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GAO warns 401(k) savers

By Jennie L. Phipps · Bankrate.com
Tuesday, March 1, 2011
Posted: 2 pm ET

The Government Accountability Office took aim at two retirement planning tools during the past week. In two separate reports, it said:

Beware of administrators pushing funds. Anyone who has a 401(k) should be cautious if the investment firm running the plan offers "education," because this kind of advice could be little more than a sales pitch. Investment companies are legally prevented from promoting funds for which they receive a special sales incentive. But the report said that doesn't prevent them from subtly promoting funds that are particularly profitable for them. They do it by urging savers to invest in a certain type of fund and then only offering one or two choices. The GAO said in the report released Monday: "Participants who confuse investment education for impartial advice may choose investments that do not meet their needs, pay higher fees than with other investment options, and have lower savings available for retirement."

Read the target-date fund fine print. Target-date retirement funds are loosely defined and therefore, investors can't count on getting what they think they're getting, the GAO reported last Wednesday. The purpose of target-date funds is to invest in "age appropriate" investments to produce an increasingly conservative portfolio the closer investors get to retirement. But after examining an array of the funds, the GAO concluded that the equity allocations for funds with the same target date ranged from less than 35 percent to as much as 65 percent. The result of this mishmash of investment styles is an unpredictable result, the GAO pointed out. Between 2005 and 2009, among the largest target-date funds with five years of return data, annual returns ranged from a 28 percent gain to a 31 percent loss.

The GAO urged the Department of Labor to require plan sponsors to evaluate and document whether target-date funds in their plans are "appropriate" for participants. It also said investment companies should explain clearly in plan prospectuses how the plans expect assets to be distributed during participants' retirements.

The DOL is expected to issue new disclosure rules this year and these recommendations are almost certain to be part of them. In the meantime, if you're invested in a target-date fund -- in or out of your 401(k) -- make sure you're comfortable with the fine print.

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59 Comments
Joel H – Far South
April 29, 2011 at 11:55 pm

I was stunned at the opening line... "Government Accountability Office" If that is not the biggest Oxymoron line of 2011, I'll be had and believe everything that my investment firms tell me!

Evan
April 28, 2011 at 8:19 am

When will the SEC (a) require financial planners and those providing financial advice for a fee (any fee) to be treated as fiduciaries to those they are advising (addressing the issue of self-dealing by promoting certain funds in which the advice giver has some interest), and (b) require real transparancy as to the cost of investments, both as to the annual fees charged by the investment, what the advisor is paid, and what, if any, money the investment pays to the advisor? Until those simple but far reaching reforms are made, the advisors will continue to play a shell game with the facts and the field will remain ripe for self-dealing and fraud.

While on the topic of transparancy, when will the federal government require a conspicuous declaration of the total tax on an item, and a breakdown of what entities are levying the tax? Consumers deserve to know just how much tax is being imposed on whatever it is they are buying, and not providing that information keeps perpetuating a stealth taxation system in which it is extremely difficult to determine just exactly what an individual's real tax burden is. If they made taxes transparent, I am sure most people would be surprised at just how much of their income is spent on one form of tax or another, and that in turn would make legislators more accountable.

penny
April 27, 2011 at 3:41 pm

grace..you are right--mostly. there is a specific fund set up for SS. However, Lyndon Johnson with his 'great society' legislation set up a process that allows the federal government to borrow SS funds and replace them with treasury bonds or IOUs. If the US government gets into too much debt, it can default on it's loans....IOUs are loans. Who do you think the government will pay first? China who can blow up in two shakes and invade our country like ants, or cut SS payments to make foreign debt payments?

gracesw
April 27, 2011 at 12:49 pm

@Earl that is untrue - the Social Security Administration FAQ are clear that there is a specific trust fund established in 1939, and it has never been put into the "general fund". Please go to the Social Security website for correct information.

dan
April 27, 2011 at 9:01 am

Bring Back America's jobs!

apple-eater
April 26, 2011 at 3:17 pm

I can see we have some very opinionated people making comments that really don't have anything to do with the topic.

These crooked schemers need to be locked away and have all of their assets seized and sold then have it deposited directly into what was suppose to be escrowed trust funds for people who paid for the Insurance called Social Security. If SS had been escrowed and invested in gold as it should have been, There would be a surplus to take care of the needs of those who paid into the fund. It seems Earl believes in the same thing Obama does - take everything away from those who have invested for their "golden years". Obama wants to take ALL of our retirement accounts and put the funds into the general coffers to "reduce the debt". He wants to give our SS to the illegals who haven't paid anything into the program. They are illegal and by the nature of how they got here are criminals, and it doesn't matter where they came from. If they are here illegally they should be treated as the criminals they are and incarcerated in unpleasant conditions and then ALL of them and their relatives, including their "anchor babies", be sent back where they came from.

And yes I have strayed off topic also, and I apologize. I am just fed up with all the bleeding liberals who are selling this country out while encouraging ID theft, steeling our job, and gutting our social programs to support illegals who can get thousands of dollars every month with no documentation and not contributing to our economy.

fincher
April 26, 2011 at 2:15 am

Unless we force our politicians to vote for a constitutional form of government things are just going to get worse. It stupid to think every one deserves something for nothing. We should only reward those who are fiscally fit to earn their rewards and not take their earnings to give away to some dead beat that won't work. Every one should earn their keep until they become to old or physically unable to do so.

Mais
April 25, 2011 at 10:05 pm

Bring back American Jobs!

Earl
April 25, 2011 at 3:01 pm

SS is and always has been 100% general revenue tax as ruled on by the Supreme Court in 1937. There was never ever a trust fund. It was never set up that way, just sold that way. In 1959 the Supreme Court ruled again, you have no right to any money collected in the name of SS. Congress has every right to cut you off 100% from recieving any money out of the program.

Bottom line, it's time to stop screwing the next generation and put an end to the lies and the ponzi scheme. So many people are so uninformed on this subject. So before you respond to what I posted, take the time and do your own investigation to learn the truth.