Question: A portion of my friend’s 401(k) portfolio is invested in a bond fund offered by a well-known mutual fund company. On his quarterly statement, the fund is listed under the category of Investment Grade Bonds.
But according to the company’s own website, the fund has 63% of its bonds in Below Investment Grade bonds.
For the safety of the plan participants, I think there should be some standard or definition for when a bond fund can be called investment grade. I feel that X% of the portfolio needs to be in investment grade bonds; I don’t know what that percentage is, but to me when only 37% is investment grade and 63% is below investment grade, it shouldn’t qualify for the Investment Grade Bond label.
When I asked a plan representative about this, his response was “We give them paperwork. They know what they’re getting themselves into.” Needless to say, it was a pathetic answer and one that made my blood boil. Yet I wasn’t surprised.
I think this is a huge red flag. What are your thoughts?
Ric: I share your angst. SEC regulations permit a fund to call itself something so long as at least 80% of the fund is invested in that way. But I doubt most consumers would be happy to learn that their “government bond fund” has 20% of its assets in junk bonds or that their “stock fund” has 20% of its assets in cash.
Indeed, mutual fund names can be very misleading. That’s why I named this as one of the 25 deceptive business practices of the retail mutual fund industry in my award-winning book The Lies About Money. I wrote that in 2005, and it’s a shame that problem still exists.