Would You Let Goldman Sachs Manage Your 401(k)?

Goldman Sachs wants to run your 401(k). Having allegedly helped a German and Dutch bank manage their CDO investments into oblivion, the most controversial firm on Wall Street now wants to help you do the same with your nest egg. Think about it: This could be your first opportunity to trust your life savings to a company that at this very moment is fighting an SEC fraud lawsuit, that has little experience in the 401(k) market and that has no demonstrable skill in investing other people's money. Chances like that don't come along every day.

In the story reported by Bloomberg's Amy Feldman, Goldman has brought in a new executive, Bill McDermott, to help expand the company's so-far minor presence in 401(k)s. McDermott believes that Goldman could distinguish itself by offering hedge-fund like "absolute return funds" and by creating target-date funds that allow investors to turn their accumulated savings into an annuity at retirement. Based on Goldman's record so far with similar funds, there's no need to get too excited.

Absolute return is the latest buzzword for Wall Street's version of cold fusion: ie, return without risk. Using "sophisticated" techniques borrowed from hedge funds, these portfolios aim to give you a steady rate of return above and beyond what you could get in safe investments, like Treasuries, regardless of how the markets perform. This is exactly the self-contradictory, if not fraudulent, claim that was made for CDOs during the mortgage bubble. Most of those triple-A-rated investments are now worthless. Similarly, many so-called absolute return funds lost their shirts in the credit crisis.

Could Goldman's funds be different? Goldman has some of the best computers on Wall Street, after all, and its people are paid so well they must be geniuses. CBS MoneyWatch investing columnist Larry Swedroe isn't impressed. You cannot have return without risk, he says. It's illogical. "Anyone selling absolute return funds should be forced to wear a shirt printed with the words, 'I don't know what I'm talking about.'"

But you don't have to take Swedroe's word for it. You can observe the real-life return of a hedge-fundish Goldman Sachs offering, a mutual fund called Goldman Sachs Absolute Return Tracker (GJRTX). The fund aims to track the return of a basket of absolute-return hedge funds. It does so only too well, and that's the problem. Since most absolute return funds in the index fail to provide steady, risk-free growth, so does the Goldman fund that tracks them. The Morningstar analysis of GJRTX concludes: "The fund successfully replicates the average hedge fund, but investors may not want to own it."

How about those Goldman target-date funds? There the company also has a public track record-unfortunately for Bob McDermott. Of the five target funds in the Goldman stable, all lag the average in their category since inception. (Morningstar's chart of the 2020 fund is below.)

Goldman's 2020 fund hasn't kept pace with its peers.

The problem may be partly that the constituent parts of the Goldman target funds-like Goldman Sachs Large Cap Value and Growth funds (GCVIX and GCGIX)-are mediocre. Goldman may be perfect trading for its own account, but it's not so good with other people's money. Seven of Goldman's nine "recommended top trades for 2010" have also lost money this year, As with the Absolute Return Tracker, if the underlying investments are subpar...well, they don't get better by being put together in the same portfolio. Goldman should have learned that with its CDOs. The investors who bought them from Goldman certainly did.

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