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GAO warns 401(k) savers

By Jennie L. Phipps ·
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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April 19, 2011 at 6:42 am

PaulS is confused, another ignorant tea party. Its Republicans that are after his pension. And they'd be right, the math just doesnt work. Unlike Social Security which can be salvaged, public pensions are bankrupt. Pension administrators would be wise to start cutting deals. PaulS should get what he paid "in" with 4.5% cimpounded interest over 20 years... and be happy with it. Its better than the alternative... ZERO.

Thomas Avery Blair
April 17, 2011 at 7:51 pm

I would like to add about Wall Street and those who sell financial products to under-educated (lied to) taxpayer/investors. By profession I am an Enrolled Agent and I prepare tax returns, represent taxpayers before the IRS administrative divisions (i.e.: Examinations, Collections and Appeals) and also work with my clients in wealth retention efforts through tax planning and research into various commodities, the consequences of the "rule of 72" miracle and curse of compounding, etc.

Your comment was very much on-target about the profit motive by investment consultants...but I would have to extend it a bit further: If the investment consultant is going to give taxpayers tax advice on their investments, why are they not subject to the "registered tax preparer" rules enacted in 2010 and put into full force and effect as of January 1st 2011? You would be amazed just how many unwary seniors and others take tax advice that is all too often 100% wrong! As do so many others in my profession, we spend much too much time correcting or having to deal with the consequences of "financial consultants'" inaccurate and incorrect tax-related advice to often-financially-harmed taxpayer/"clients."

At least food for thought, is it not?

Respectfully submitted,

Thomas Avery Blair, EA

Roger Summey
April 17, 2011 at 7:05 pm

How much is in social security right now.
How much has the government taking out and how did they do it?
Is thier a government iou for SS, and if so when are they going to pay it back.
How many people are now on it that never paid into it.
I don`t see anybody really asking these questions

Paul S
April 17, 2011 at 4:13 am

You mean that I have to give up my pension having worked over 30+ years to achieve because you didn't plan for your retirement? Many of us went to school, worked our butt off, went without while are friends in the private sector were living life "high on the hog" and not planning for their retirement. Now, because SS isn't what you thought it was going to be, I am supposed to give up a life time to hop in your leaky boat? This is typical class-warfare dribble spoon-fed by liberals rather than fixing the problem. Instead of condemning us all to this SS ponzi scheme, how about developing a decent pension system for everyone with mandatory savings in a true trust fund so you'll have something to retire on and break the bonds of economic slavery that liberal government policy is only to happy to provide.

April 15, 2011 at 4:31 am

At the beginning of this year our company, a very large global company, changed 401k administrators. In researching offerings from the new admininstrator I found they are mainly target date retirement funds. Fortunately I am old enough to be able to move my money without penalty and did so. The Target date funds which were offered did not have enough history to see performance for 10 years and the history they did have was not good. As one of the comments here indicates, financial institutions are there to make money so beware.

April 13, 2011 at 8:07 pm

I agree that SS must be fixed. Where the congresses and presidents have "borrowed" from Social Security, it's now time for a payback. Except for those serving in the military, all other government employees, from the President on down, should be more than willing to turn over all their pension benefits to social security. In reality that's where us working people were forced to place our money. Then it was used for the benefit of the country. Government employees are a part of the country. They should be the first of the patriots to stand up and give. That should prevent dipping into private sector worker's pocket's.

tommy ronio
April 13, 2011 at 8:16 am

befor congress goes playing with ss put them on the same plan we are on. to me they are not worth what we are paying them any way espsaley their retirement plan. i have worked all my life and payed into ss leave it alone or put congress on it to then i just bet it will be fixed

April 11, 2011 at 9:06 pm

What we all must realize is that financial institutions are after nothing more than your money in the form of constant and every increasing fees. While these institutions might call you clients (suggesting some sort of special relationship), they are nothing more than used car salesmen. They are after your money, all the time, in as many ways as possible. Do not view them as your friend or as having a special relationship with them.

Konrad Benz
April 05, 2011 at 9:26 am

I remember an old saying, the investment firms offer you kitchensink funds for the 401k; certainly not their good ones.
They also do not have a column in their statement that tells you the total of money you and your company put into the 401K account. You only get the total of the accounts worth at the time. This would be a nice requirement by the consumer protection agency to put into reporting requirements.

James Martin
April 05, 2011 at 6:10 am

Right before the Dot Com Bust back in the 90's, I decided to cash out my 401K because I felt I could no longer trust Wall Street with any of my money. I decided to put my money into real estate. Since then I have bought 3 rental houses and paid cash for them. I also paid off my personal residence. At 51 years of age, I receive $45K per year from rent. Most of that income is saved and re-invested in more real estate. I plan to buy another house cash within the year. I am averaging 15% returns on the cash I have invested. This seems to be working out much better than a 401K and I don't wait for my returns. They are coming in every month. I'm very happy with the decision I made in my 30's.