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.
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