Congress, hoping to nudge Americans toward better investing habits, made it much easier in 2006 for employers to designate target-date funds, instead of cashlike money-market funds, as the default choice for anyone that didn't pick their own investments.
Yet many retirement experts say corporations don't do a good enough job for their employees, often simply picking the target-date fund run by the investment company that also handles back-office accounting services for the corporation retirement plan. That's partly because fund companies typically offer those accounting services at a cut-rate price-or even for free-if employers agree to accept in-house investment options that carry higher fees.
The marketing tactics make plans "look free" to employers, while costing workers extra, says Ryan Alfred, president of BrightScope Inc., a firm whose research on how companies select target-date funds was also cited by the GAO study.
Investors should be able to find basic information about target-date fund fees in marketing materials like a fund's prospectus. Morningstar also tracks fees and rates target-date families based on performance. Its top-rated ones: Vanguard, T. Rowe Price and American Funds.
Investors who own target-date funds through their 401(k) plans have limited options. One is to replicate a target-date strategy with a combination of lower-priced funds on their plan's roster. Another is to lobby their employer to change plans.
Congress has been looking into target-date funds and may take up the issue later this year. Sen. Herb Kohl (D., Wis.), chairman of the Senate Special Committee on Aging, plans to introduce a bill in April that would effectively require target-date fund managers to become fiduciaries-who must act in investors' best interests-for their funds to serve as default options in retirement plans.
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