Be careful of 401(k) 'education'
A new study by the Government Accountability Office warns investors to be cautious if the investment firm running their 401(k) plan offers education.
Many 401(k) plans offer broad guidance to help workers make investment decisions. The advice typically comes under the rubric of “education” and stops short of recommending specific investments.
But what’s portrayed as education actually may be a sales pitch, the study says.
Many firms that run 401(k) plans have financial incentives to push certain investments. They receive hidden payments from mutual funds in the plan. And some funds make higher payments, giving 401(k) providers a big incentive to tout them.
Firms are legally barred from recommending an investment simply to get a hidden payment. But there’s nothing stopping them from subtly pushing a fund.
For example, a 401(k) provider might suggest broad types of funds based on an investor’s age and risk tolerance. They don’t name any funds, but the only way for an investor to follow the advice would be to buy a handful of specific funds.
Other times, 401(k) firms say investors “may wish to consider” certain funds, the report said.
The result is that workers may get stuck in inferior funds, according to the report.
“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,” the study says.
-- Walter Hamilton