Employers not liable for 401(k) losses in target account by Kathleen Pender, San Francisco Chronicle, Sunday, October 28, 2007.

The U.S. Labor Department last week issued final rules designed to get more employees participating and investing more aggressively in their 401(k) plans.

The new rules say that employers can’t be held liable for losses in a 401(k) account if they enroll employees who don’t sign up themselves and direct their contributions into one of three qualified default options: target-date funds, balanced funds and managed accounts.

Fund companies had a lot to gain by pushing target funds. A target fund is usually a collection of a company’s other stock and bond funds.

Many of the big 401(k) service providers - such as Fidelity, Vanguard, Merrill Lynch, Putnam Investments and T. Rowe Price - also manage some or all of the funds that go into a company’s plan.

Over the past five to 10 years, employers have been pushing these service providers to add more outside funds. As a result, a smaller portion of 401(k) assets are going into the providers’ funds.

“To the extent they can get more money to flow to target funds, that brings a greater portion of the plan’s assets back to their proprietary funds and their higher-margin funds,” says Jon Chambers, a retirement plan adviser with Schultz Collins Lawson Chambers.

Target-date funds are a good default investment “for a workforce that is relatively stable,” Chambers says. But “if you have a lot (of) employee turnover, and your turnover tends to be highest among your youngest people,” target-date funds might not be the answer, he adds. That’s because target funds for young employees tend to be almost entirely in stocks, which are more likely to lose money over the short term than the long term.”