Nutritional Labels for Mutual Funds

Should investment products come with better labeling?

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So far, the best idea to come out of today’s Brookings Institution conference on financial literacy in Washington, DC is to slap nutritional labels onto mutual funds and other investment products. Instead of calories and fat, the labels would list expense fees, historical rates of return, and other key facts. That way, people can easily compare investments just as they do now with types of cereal. (This idea was suggested by Julie Agnew of College of William and Mary.)

Among the other highlights:

  • Annamaria Lusardi, Dartmouth College: Americans have “alarmingly low” financial literacy rates. Most people are unfamiliar with the effects of inflation, compound interest, risk diversification, and basic asset pricing. One out of three Americans have given no thought to retirement planning whatsoever.
    • Lusardi: Those who don’t plan for retirement end up with half as much wealth as those who do. In other words, retirement planning is a strong predictor of wealth.
      • Agnew: Even when employers offer automatic enrollment into 401(k) plans, 14 percent of employees opt-out. Those with lower financial literacy scores were less likely to participate. Some of those who opted out are not even aware of their employee match.
        • Robert Willis, University of Michigan: “Smart people” – those who understand the value of investing and put significant amounts of money into the stock market through their retirement accounts – have been hit hardest during this crisis. So much for being "smart."
        • Another thought: If one more person calls this crisis a “teachable moment,” I will officially protest. Do those same people see every tragedy through the lens of what we can learn? Sometimes bad things happen, and they are just bad. Calling them a good learning opportunity puts too happy a face on the situation.