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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
DS
April 02, 2011 at 4:59 am

ej, no that's not correct. A 401(k) is owned by the participant. The participant chooses a beneficiary. Upon death the balance in the participant's 401(k) account would become the asset of the beneficiary. If no beneficiary is named, it will become an asset of the estate of the participant.

Also, in a 401(k) plan, the participant chooses the funds, from those offered by the plan, in the plan that their contributions (& any contributions by the employer) are invested in. While the plan can limit the number of funds available but they have to offer funds in several risk categories for participants to choose from i.e. Large Caps, Small Caps, Bonds, Money Markets or as in the example above, target-date funds.

DEECEE
April 01, 2011 at 8:22 am

@ej,
You're confusing target retirement 401K investment option with garanteed annuity (or in some circle "income insurance"). A agranteed annuity is almost ALWAYS a bad investment, as the investor is betting against his/her own longevity (buying a $1milllion policy at 65 to only die at 66, as in your example). The annuity sellers have done more than adeqaute study and risk hedging to ensure the price for the policy always on average give the insurer a great profit margin, and it's safe/cash front transaction, the best kind a policy seller could possibly get. So NEVER buy a retirement annuity, because the cheap one's risk the company's viability and the more expensive ones are just profit for the seller.
The age target 401K account issue is a completely different animal. The problem discussed here is that there is so little regulation, uniformity and transparency among the different "target" accounts, it's difficult for an investor invovled in one of these target retirement account to truly understand the risk exposure posed by enrolling in one of these account (as demonstrated by the vastly different returns on these accounts). I personally won't touch the "target retirement" funds in my 401K account with a 100 ft pole for that very reason, it's bad enough 401K acounts haave lots of murky composite funds with vague naming conventions like "small value fund" etc, it's even worse to assume the bozo at your 401K management company know your personal situation enough to be able to allocate your assets properly for your retirement. Don't use the "target retirment" account, allocate your own asset based on your comfort level of risk exposure, and stop sweating day to day or month to month variation until you're within a decade of your retirement, and then start shift your assets to more mixed income investment at YOUR OWN PACE.

ej
March 31, 2011 at 5:54 pm

So, if I read this article correctly, a person can take $1,000,000 of lifetime after tax savings, transfer it to a company in exchange for a piece of paper that says you will receive a fixed payment for life, subject of course to the usual array of legalese, fees and assuming the company is around until you die. Legally then, if you by chance put up your $1,000,000 bucks at age 65, then die at age 66, you forfeit the rest? Common sense dictates that one is much better off just buying life insurance and spreading your money in FDIC insured CDs. Principal risk cannot be eliminated and or contracted away in a piece of paper. It seems the most sensible path is for folks to get educated and manage their own finances and investments. I much rather lose money by my own hand than take a chance on flopping markets and the legal system.

CB1111
March 31, 2011 at 3:52 pm

the SS trust fund has been raided and replaced by IOU's. They claim the bank is full because the US government always pays its debts. With trillions in debt and growing, the trust fund is only as good as you believe that we can repay the borrowed money.

John
March 31, 2011 at 3:41 pm

Fact is GAO is not looking out for anyone.
Secondly the government penalizes people who invest in 401k.
A: 10 percent penalty for taking money early.
B: Double taxing if you borrow from yourself.
C: Waiting till 59.5 years of age.
This is because it is not a true savings and we don't live in a truly capitalistic system.

TexanPatriot
March 31, 2011 at 1:08 pm

There are several flavors of 401(k) available. Some are very tightly controlled, others very loosely. The employer determines the restrictions, but the best practices are that you put your money in, they put a match if any, and it goes to an independent firm who allows liberal (small-"L") choices on investments and frequent switching, and loans.

If you don't like your 401(k), well, it's the "new" pension, but you have other means of retirement savings, taxable and deferred taxable.

mi17mtp
March 31, 2011 at 11:33 am

show me the money!

Reginald Perrin
March 30, 2011 at 3:17 pm

@Muttley -- how do you "know" that you won't be able to collect Social Security in 19 or so years? The fact that you claim that SS is bankrupt shows that you are completely uninformed. Before you call people sarcastic or stupid, why don't you educate yourself?

Reason
March 30, 2011 at 10:29 am

Calm down, everyone. The article isn't talking about anyone taking over your 401(k) or abolishing it or increasing the taxes on it or anything else that anyone is griping about. It's just giving people a "heads-up" that any 'training' or 'classes' from their plan administrators are likely going to be sales pitches for other products (I'd like to think people would expect that), and that the Target Funds aren't performing as laid out. The communication from the GAO is just to remind people to be aware of schemes and to read their prospectus.

Keith Douglas
March 30, 2011 at 8:33 am

A) After several years of receiving SS one will have exhausted one's own actual contributions. From this point on it is welfare.
B) It is not so easy to 'bail-out of one's 401k/403b. Your money is the plaything of the corporations. They use it to muck about in this abstract called 'the Market', keeping it under very tight wraps until one ages into the 'retirement' realm. One may have other ideas about how best to plan and use one's monies in preparing for a very uncertain future. That is too bad, they will not allow this.
C) There is NO safety net in the 401k/403b system. It is based solely on the whims of 'the Market.' It has no loyalty for decades of service like the pension system implied. When our economy bottoms out again you may lose everything.
D) You are 100% able to move all of your monies from an employer's system to one of your own choosing. If you are not satisfied with the ethics of the investments being made with your monies, or for any other reason, move to a company which more reflects your values. A financial advisor will facilitate this. There are no penalties to move within the system.
E) Uncle Sam and Rich Uncle Pennybags(Monopoly guy) are brothers.