Sunday, April 06, 2008

John Hancock 401Ks suck

Last December, when Kat got her last paycheck of the year, I noticed that her employer's payroll department had allowed a deferral $100 in excess of the IRS limits to her 401K. I've previously run into a similar problem when my employer's 401K plan failed nondiscrimination tests, and I was given a refund of part of my deferrals for a prior year. Kat immediately contacted her employer and 401K plan advisor, and we were told that the excess deferral would be paid out before April 15. In the meantime, I couldn't complete our tax return because we needed to know how much would be paid out (the amount would be different from $100, based on how much the funds it was invested in had lost or gained) and some other information in order to complete the appropriate additional paperwork.

In January, Kat invited me to attend a presentation at her company about their new 401K plan that they would be switching to in late February, through John Hancock. The investment options looked reasonable--a wide variety of funds, including international and emerging market funds, and some index funds, mostly from third parties including Dimensional Fund Advisors. Her employer still wasn't offering any matching funds, but was supposedly covering all plan expenses. A big plus was the availability of a Roth 401K option, which we selected to put all new contributions into. I was still expecting that the excess deferral would be paid out before or at the transition, but of course it didn't happen. The old plan advisor said the new one would now have to deal with it, but that the old plan would issue the 1099-R form. But not until 2009, so I'd need to collect information myself to fill out a substitute Form 4852, because this would still count as 2007 income.

In early March, we got online access to the new 401K, and we were in for a surprise. I'm used to accounting for all of our investments using Quicken, which allows downloading of stock quotes via the Internet. But strangely, none of the prices reported online via John Hancock bore anything but a slight resemblance to the stock prices of the underlying funds we had selected to invest in. Rather, John Hancock's website reported all of the funds as "subaccounts" with "units" instead of shares, and "unit values" instead of share prices. There seems to be no way to get the unit values on a daily basis, only when a transaction occurs, and then I get to enter them manually. It may be possible to import into Quicken by downloading the transaction history as a CSV document and writing a script to change its format, which I'm sure I'll pursue in due time.

If units were equal to shares, we were paying $2-$5 a share more than the market share price for every purchase. Fortunately, that doesn't appear to be quite how it works, though I'm still unsure of the details since the plan advisor had made no mention of this. The John Hancock materials and plan administrators do not seem willing to explain in any detail, beyond noting that there are additional fees hidden in these costs, and that there is a benefit in getting access to A-shares of these funds at a discount. So much for the employer covering all of the plan costs.

But we still needed to get the incorrect excess deferral refunded so that we could file our tax return. Finally, the John Hancock site showed that a check for $97.39 had been issued on March 20--but with no accounting for any subtractions of units from any of the subaccounts. The check arrived in our hands only yesterday--April 5--apparently delivered by pony express. The documentation with the check showed that there had been a further $30 transaction fee deducted from the account, eating away another third of that incorrect deferral "investment." It also, helpfully, reported a number of units for both the check and the fee, something the online transaction history left unstated. It didn't, however, show how many units were taken from each subaccount. I compared the number of units that we had purchased through all the transactions in the history, compared the difference to what John Hancock is currently reporting, and found that the difference was close to, but not identical to the sum of the units that had supposedly been taken out. This was made slightly more difficult by the fact that while the site reports on the dollar total of the Roth 401K, it only reports the units per subaccount as a combined total of the Roth and traditional 401Ks.

In attempting to check again in more detail today, I found that John Hancock's site doesn't permit users to look at transaction histories on Sundays (or before 9 a.m. ET or after 9 p.m. ET on Saturday, or between 3 a.m. and 7 a.m. ET on weekdays). I could still look at total holdings, however--I'm not sure what kind of rule is being followed here with this restriction, religious or otherwise.

Doing a little searching online, I see multiple complaints about extortionately high expense ratios on John Hancock 401Ks. Apparently John Hancock is the choice of plan provider for small employers who want to minimize their costs and shift them to their employees in a relatively untransparent manner. For comparison, most index funds have relatively low expense ratios. I have some money invested in USAA's S&P 500 Members Shares Index Fund, which has an expense ratio of 0.19%. (Once I reach $100,000 in that fund, I can move it to USAA's S&P 500 Member Rewards Index Fund, which has an even lower expense ratio of 0.09%.) My 401K, through Fidelity, is mostly in Fidelity's Spartan U.S. Equities Index, another S&P 500 index, with an expense ratio of 0.09%. John Hancock's 500 Index Fund, by contrast, has an expense ratio of 0.54%, plus an apparently undisclosed "sales and service fee," which apparently goes to third party plan advisors and managers. That is ridiculously high for an index fund. John Hancock's other funds are worse. (We at least intentionally selected funds that had the lowest available expense ratios of the types we wanted, which included DFA's international, emerging markets, and small cap funds.)

I advise that you check out the 401K plan offerings of a prospective employer and weigh them as part of your decision in taking a job there. If they use John Hancock, that should be a mark against them. And once you leave a company that has a 401K through John Hancock, I recommend immediately rolling it over into an IRA with better investment options.

If any readers can shed additional light on how John Hancock's "subaccounts" and "units" work, along with any advice on how to get more transparency and accountability out of them, I'd appreciate it. Other reports of experiences with John Hancock are also welcome.

UPDATE (April 10, 2008): I can get per-day unit values from the John Hancock site, but only for the previous day's price, and there's no way to download them in an importable format except with the quarterly statements, so if I want them in Quicken I need to look them up and input them manually, or just do it once per quarter.

UPDATE (June 2, 2008): As moneyman2424's comment below indicates, John Hancock, an insurance company, sells 401K investment options that are actually annuities, which have their own expenses on top of the underlying equities. There's a good discussion of this subject at the FundAlarm discussion board.

UPDATE (July 19, 2008): The John Hancock 401K suckage continues. Their website is down all weekend for maintenance, and the second quarter of 2008 is the second quarter in a row in which there have been extortionate unexplained fees, this time wiping out all gains and then some for the quarter. There are two line items for fees, one simply labeled "fees," and the other labeled "RIA investment advisory fee." An RIA is a "registered investment advisor," but we've received no investment advice from anyone in the second quarter, or at all, for that matter. There was a presentation from someone explaining the 401K when we signed up, but he offered no investment advice worth paying for, simply explaining the funds and offering some suggested allocations which we didn't follow. He also failed to mention any fees (rather, he said that the employer would be covering all of the fees, which was obviously not true), failed to point out expense ratios, and failed to mention that we're investing in "units" in annuity "subaccounts" rather than actual shares in actual mutual funds. In short, if anything he should be paying out compensation for his omissions rather than receiving a cut.

UPDATE (July 26, 2008): Another complaint--John Hancock reports unit prices to three decimal points. With every reported purchase, there are several funds where the purchase price per unit is a tenth of a cent above the reported unit price for the day. It's just another way for them to collect a little bit more money in a non-transparent manner.

UPDATE (July 28, 2008): CNN/Money ran a story on July 23 about living with bad 401Ks.


Einzige said...

Given that both ADP's and Meryl Lynch's 401Ks do the same sort of thing, I imagine this scheme is fairly common. The lack of transparency is definitely suspect (aside from being annoying).

At least ADP updates the unit price on the site every day, so in Quicken I can manually update the value of my account whenever I'm curious.

Einzige said...

Wow. I'm jealous of those expense ratios you mention. I got curious so I checked into my Vanguard funds, which I remember thinking were pretty low, the last time I looked. The ratio for their S&P 500 Index fund is 0.15%.

And, yikes, ADP's S&P 500 Index fund has an expense ratio of 0.70%, which makes the John Hancock offering seem a bargain, by comparison.

There's definitely a down side to working at small companies!

moneyman2424 said...

Most John Hancock plans are group annuity contracts and do not use retail mutual funds. This is the reason for the hight expense ratios and why you cannot download the info into Quicken as the NAV's (net asset values) are not reported daily as they are for mutual funds. This is a typical broker sold plan. The brokers sell these plans at "no cost", and bury all of the plan expenses and their commissions into the expense rations of the underlying investments. These plans generally have "all in" costs of 2-3%, not a good deal for the employee.

Einzige said...

Why they don't simply raise the allowable IRA contributions to the same level as 401Ks, thereby enabling employees to bypass the problem completely, is beyond me.

Undoubtedly there's some rent seeking going on somewhere, here.

Ducks said...

We are dealing with a JH 401(k) plan as well. It's horrible, no doubt. My eyes have been opened. I hope as you figure out ways to work around this plan, you will share them with me.

We have gone with the S&P 500 and the PIMCO Total Return for now... but I am also beginning a campaign to get the company to switch 401(k) providers. I'm working on a spreadsheet to show TPTB how they are getting hosed by fees. Hopefully it will be a good sales tool. We'll see.

For further commiseration, You can reach me at rowofducks-at-comcast-dot-net

- Ducks

sundayline said...

I'm 28 and just started my first job offering a 401k with John Hancock. I wonder how to make the best of the situation? I've been contributing 15% (I make 45000/year) to compensate for the lack of employer matching, but the fees range from 1.35 to 1.69 for the better performing funds(four or five stars on Morningstar) I desperately need advice on what to do to invest smarter as I realize I'm getting screwed on fees.. just don't know what my other options for retirement savings are. Should I just lower the contribution and do something fun with the money as it feels like I'm just throwing it away?

Jim Lippard said...

sundayline: Since you have no employer match, you're better off first maxing out ($5,000) an IRA or Roth IRA, where you can choose index funds with low expense ratios. To reach your current 15% figure, you then would only need to contribute 3.8% to your 401K.

I'd strongly consider a Roth IRA--although it lacks the income deferral/tax avoidance now, it will yield tax-free income at retirement. Since you're only 28, it will have a long time to make gains that will all be tax-free for you.

Note that I'm not a financial advisor and this is solely my nonprofessional opinion.

Einzige said...

I second Jim's comment (and I am also not a financial advisor).

As I mentioned before, Vanguard has excellent expense ratios for the funds in their IRAs.

As to your 401k, I'd imagine they have at least 1 index fund in their menu of funds, and I imagine it's fee percentage is pretty low. Since you're presumably a long way from retirement, an index fund is going to be your best bet for the next few years.

Realist777 said...

Einzige, the expense ratio you are seeing for the S&P 500 Index fund is the total expense for that investment. Since ADP offers mutual funds on their platform, you aren't comparing apples to apples. As the blog mentions, John Hancock plans are set up as a Group Annuity. The Expense ratio you see on their website might just be a portion of what you are actually paying for a particular investment. There is an addition Asset charge (that could be up anywhere from .5% - 3%) that is also coming out. This is usually only disclosed on the contract which is signed by the plan sponsor at your company. Transparency becomes an issue with plans like this. For anyone who is wondering how to find out what their total expenses are... First off, check your 401k website, and see if it refers to your investments as "units". If so, you are investing in sub accounts (not mutual funds), and are in a Group annuity plan with "hidden fees". John Hancock, Principle, Hartford, Lincoln, Met Life, etc are all insurance companies and predominantly offer Group annuity types of plans. You will need to go to your employer and request a full fee schedule from Hancock. Don't be surprised if they don't know what you are talking about as employers barely understand the fees half the time. On the other hand, if your investments have ticker symbols that you can look up on Morningstar, they are most likely mutual funds. Fidelity, American Funds, and ADP, are examples of 401k providers that don't offer Group annuity plans. You are invested in the actual mutual fund itself, and there is no additional hidden asset charge. If you notice that your expense ratios don't seem to be very competitive (in relation to other 401k plans you have seen), you are most likely employed for a small company. In general... the larger the pooled assets of your plan, the better share classes you can qualify for ... which means lower expense ratios. Feel free to bug your boss about it. It may be that no one has paid attention to it, and your plan may qualify for better share classes.

Griff said...

My employer offers JH 401K's and I have opted to sign up (they only offer sign ups every year). I am only 19 years old working part time while attending college and plan on contributing 6% of my yearly income (~$9000). My employer matches $0.50 up to the first 6% that I contribute. Should I be concerned about the things that you talk about in your article? I'm very new to investing and this is my first retirement account.

I realize that this post is over 2 years old :(

Jim Lippard said...

Griff: You are right to take advantage of the 6% match--that's essentially free money. You should be concerned about the expense ratios as well--they should factor into which investment options you choose. I wouldn't contribute any more than the 6% to your 401K, though--if you can afford to invest more, better to contribute to an IRA which you can put into investments of your own selection with low expense ratios, rather than contributing more to the John Hancock 401K. (Unless, of course, you can afford to max out an IRA in addition to your 6% contribution and then some, in which case the "then some" can go into your 401K.)

(This is just my opinion, and shouldn't be considered to be investment advice. Consult with your own financial advisor...)

john said...

The retirement plan market is full of lemons. And low-quality providers want to make cost and quality determination as difficult as possible for consumers. (By the way, cost may be the most important indicator of quality in the investment business, and they are negatively related.) There are some competitive providers out there, but the market is so difficult to understand, that the lemon providers aren't losing enought business to force them to get competitive.

The Punisher said...

I am employed at a small company that has JOHN HANCOCK for its 401K account. My question is this...I had to borrow from my JOHN HANCOCK 401K Acct....The INTEREST RATE IS 9%...NINE PERCENT ! ITS MY MONEY ! IS 9% in a 2% economy actually legel ? Is there anything I can do to reduce it or make some noise & hope somebody hears me..

Jim Lippard said...

Yeah, that's legal. It's your money, but it's tax-deferred money, and that has conditions attached to it. Borrowing from your 401K is like borrowing from a pension, you have to pay it back with interest, and if you fail to pay it back, you then become liable for the deferred taxes.

MW said...

My employer also offers JK. Would it be wise to take advantage of the free money my company matches by maximizing the percentage, then doing a direct roll over to an IRA when I no longer work there?

Jim Lippard said...

If the value of the match exceeds the costs of the fees (which is likely), then yes, that sounds like a good idea.

Financeguy33 said...

The problem with John Hancock is that they charge an asset fee on top of the expense ratio. They are a group annuity contract. If something shows an expense of .15% it is usually 1.15%. With Fidelity and ADP they don't have wrap fees.

adisanta said...

Anyone who is interested to learn more about the John Hancock Fees, I have all the internal Fee information provided to sales reps for John Hancock and after being in the Retirement plan industry, and selling against John Hancock for 5 years, I know and have proof of a breakdown of all layers of fees associated with not only each John Hancock plan, but each fund individually broken out with the the fees based on what share class you are in. If anyone is interested to discuss, I will be happy to educate and provide information that is all 100% from there company and I only look at facts, nothing assumed. All i ask for in return, is if you are happy with my help that you consider, trying to get me an "in" to your company to propose a better solution. I will be happy to give you all info before my request back and honestly, I have no problem doing it with nothing in return. Like I said, I would like an "In" but i will not hold anyone to it. I believe that everyone deserves to understand fees associated with their plans, and also be able to use their 401k as a benefit without being mislead or scammed by these company's making a fortune off of people just trying to save for retirement! My email is:

nada said...

JH 401K sub account is a total sham. You can never tell if you are receiving the dividends that you are entitled to. I am on hold right now with hancock customer service trying to find out if I recd recent divided for Royce Opportunity fund RYPNX. They refuse to tell me what I recd in dividends. Royce shows Final year-end distributions will be payable on December 5, 2013 to shareholders of record as of December 4, 2013. Distributions will be paid to all Fund shareholders who own shares on the record date, regardless of how long they have held the shares. This fund dividend is 1.64 per share. Lucky for me my former employer is terminating the 401k plan for the entire company today. Now I can move the money into an ira where I can see everything in black and white.