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.