Matt Yglesias wonders whether he should invest some of his 401(k) in John Hancock’s International Value Fund. Naturally, one of the key pieces of information about the fund that he wants to know is its expense ratio: what kind of fees does it charge?
Yglesias eventually found the relevant bit of the John Hancock website; it runs to 421 more or less incomprehensible words. (Exempli gratia: “For internally-managed Funds advised and sub-advised exclusively by John Hancock’s affiliates, the total fees John Hancock and its affiliates receive from these Funds may be higher than those advised or sub-advised exclusively by unaffiliated mutual fund companies. These fees can come from the Fund or trust’s Rule 12b-1, sub-transfer agency, management, AMC or other fees, and may vary from Fund to Fund.”)
The upshot of all the prose? If you want to find out the fund’s expense ratio, you have to phone up John Hancock and ask them to send you its most recent “Returns and Fees” document — which of course isn’t simply available online, and which is subject to change in unpredictable ways in future.
This kind of thing seems tailor-made for the Consumer Financial Protection Bureau to crack down on. Arthur Levitt, for one, would surely approve:
For years, I have pressed for “plain English” in financial documents that go to the investing public, but with only mixed success. The problem, it appears, is that such efforts get tugged into the ditch by the irresistible pull of legal jargon. The language of lawyers is not spoken by Aunt Edna, who rightly senses that if something sounds complicated, it is. The advice of Will Rogers comes to mind: “I love words but I don’t like strange ones. You don’t understand them, and they don’t understand you. Old words is like old friends—you know ‘em the minute you see ‘em.”
You wouldn’t buy an investment from a stranger, so why buy one wrapped in strange language?
It’s not just the mutual fund companies who deserve the blame here — it’s also the 401(k) administrators at places like Yglesias’s employer, who ignore the degree to which the options they’re choosing are readily comprehensible to their employees.
There are three main reasons why investments in 401(k) plans significantly underperform investments in defined-benefit plans. The first is that 401(k) investors have to rotate into relatively low-risk fixed-income instruments as retirement approaches and their risk appetite declines; defined-benefit plans never need to do that. The second is that defined-benefit plans have the ability to diversify into many more asset classes than 401(k) plans can. And the third is that there are multiple points at which 401(k) performance can be scuppered: at the fund-manager level, at the corporate-benefits level, and of course at the individual level. Bad choices at any one of those levels are enough to result in severe underperformance; and it’s entirely possible that you can have bad choices at all three points.
Will the CFPB have the power or the inclination to clean up the mess that is the 401(k) system? I doubt it. But if it doesn’t, no one will. And the likes of John Hancock will continue to obfuscate their customers for no good reason.
Update: Stephen Lubben points out that under Dodd-Frank, the CFPB has no oversight of investments: there’s no way they can be of use here.