This is the retirement disaster that won't get much media coverage: A study conducted by researchers at the University of Illinois at Urbana-Champaign and the Federal Reserve Board shows (subscription required) that employers are increasingly turning toward pricey actively-managed mutual funds for their 401(k) plans rather than lower cost, better-performing index funds.

Only 11% of U.S. stock funds added to 401(k) plans between 1998 and 2002 were index funds. This in spite of the fact that there are volumes and volumes and volumes of research showing that buying actively managed mutual funds is just not a very good idea. For more on this, please read A Random Walk Down Wall Street and The Little Book of Common-Sense Investing.

The problem isn't just the employers and managers/brokers, who should be beaten if they're not offering index funds. According to The Journal, "A recent survey by Vanguard of plans for which that firm provides record-keeping services found that, though nearly all participants were offered a U.S.-stock index fund, only half invested in it."

Yikes. This latest bit of news is evidence of two things: 1.) Many investors really don't know how to invest for their retirement and 2.) The people who are supposed to be helping aren't making it much easier.

A piece in Saturday's New York Times look at the question: When is it OK to tap into retirement money early? The article sums it up eloquently: "Most Americans have enough difficulty building up a nest egg, and cracking it prematurely could mean living on cat food (slang for Social Security) later."

One of main problems with taking out retirement money early is that the IRS typically charges a 10% penalty, depending on the type of account. In a ROTH IRA for example, you can take out your principal any time you like because the money has already been taxed as income. But with a traditional IRA or 401(k), you'll be hit with a hefty penalty.

While there are plenty of fast-talking late-night gurus out there who want to give you the information you need to get rich (all for the three easy payments of $29.95, but wait there's more...), the New York Times's Damon Darlin has some of the best personal finance advice that graduates don't want to hear:

• Save 10% of your income right off the top.
• Buy stuff used.
• Enroll in a 401(k).
• Don't borrow money to buy depreciating assets.
• Make your own coffee.

He offers two compelling reasons to start saving early. First, there's the most obvious one. Starting the cycle of compound interest early means your money will grow more. But then there's another one that I hadn't really thought about. Living below your means conditions you to be comfortable with a less expensive standard of living, which will also save you money in your retirement years.

There's another important thing to remember, and it's probably the best reason of all for being wise in your money management. I first realized this paradox when I was talking to my friend "Jim," who, after years of poor spending habits, has run up a huge amount of credit card debt, and lies awake at night worrying about money. He used to make fun of me for my Scrooge-like spending habits and obsession with saving as much money as possible. The other day, we sat down to discuss his problem.

In her piece What's not on 401(k) statements, Kathleen Pender takes a look at new rules governing advertising and performance reporting for 401(k)s and mutual funds. According to the piece, "Under the National Association of Securities Dealers rule, any time a mutual fund shows any type of performance data, it also must show three things: standardized performance results that follow Securities and Exchange Commission requirements; the maximum sales charges applicable to that fund; and its annual operating expenses, known as the expense ratio. The expense ratio cannot reflect any fee waivers or reimbursements."

It's not clear what effect the rule will have on 401(k) reporting, but it seems like it should apply there too, where disclosures are traditionally all even more obfuscatory than they are in the mutual fund industry. I'm hoping that companies will be required to disclose this information for 401(k)s too, but I wonder how much good it will do. Most employees don't look at or understand their 401(k) statements.

I would like to see the NASD and/or the SEC put together a booklet to be included with 401(k) statements explaining how to read/understand/evaluate their investments.

I cringed when I read this piece in the Financial Times. It looks like some 401(k) plans are getting ready to allow workers to invest in ETFs. ETFs have too primary benefits: They're easier to trade than traditional mutual funds and the closed-end nature of the funds eliminates shareholder redemptions and therefore a lot of the capital gains taxes. In a tax-deferred 401(k), these are not important attributes: You won't be taxes for a long time and you won't be trading actively either.

Then there's the confusion element: Most workers are confused enough by their retirement plans as it is, and throwing ETFs in there probably won't help. According to a piece in the Wall Street Journal from earlier this week, ETFs are not any better than traditional mutual funds: In a tax-deferred account, they might even be worse.

But how many workers are really going to research this? We need to make retirement accounts more simple, not more complicated. And adding ETFs is not the way to do that.

Yesterday the Bush Administration announced that it would look into ways to provide workers with greater disclosure about fees on their 401(k) investments. The current law, amazingly, does not require comprehensive disclosures of fees to 401(k) investors.

Congressman George Miller of California said that "This issue is critically important because even small fees can put a big dent in workers' retirement savings accounts. Workers and employers should have clear information about any fees associated with different retirement plans and investment options so they can make the best-informed decisions for themselves."

In a column in the New York Times, Paul J. Lim argues that automated 401(k)'s do not excuse the worker from putting everything on auto-pilot and then not looking at it again. Assuming that the funds selected are low-expense index funds, I am inclined to disagree with this. I think that life-cycle funds and automated re-balancing can save investors a ton of trouble and, if implemented well, create a no-hassle means of retirement saving.

In the piece, Mr. Lim points to the tendency of 401(k) investors to chase performance by piling money into emerging market funds which have performed so spectacularly of late:

Each week (usually on Saturdays), I'll bring you my list of the four best pieces from the Wall Street Journal for the past week. Did I miss an article you thought was great? Leave a comment and let everyone know.

All right, below are my picks for this past week (note that log-in is required to read the full articles):

1. Boiling Down Top Finance Books This piece lists the bestselling finance books of the past year: and two of the top three are the worst personal finance books I've read: Why We Want You to be Rich and Rich Dad, Poor Dad.
2. Can Spending a Day Stuck to a Velcro Wall Help Build a Team? I've participated in some of these team-building exercises and didn't feel like I got much out of them. But I suppose it depends on the situation. Jared Sandberg has an interesting piece on it.
3. Index Funds 30 years ago, Vanguard started the index fund revolution, Smart Money comes out with their list of the better large-cap and small-cap index funds. These are a must for passive investors and retirement funds.
4. Up for Review: 401(k) Industry With calls for Congressional hearings about collusion hurting 401(k) investors, keep up to date with the controversy.