The Green Thumb column in last weekend's Wall Street Journal discussed an increasingly popular option for mutual fund investors: fund of funds. As the name would suggest, these are mutual funds that invest in other mutual funds, in theory at least, applying the managers expertise to select great investments and provide the retail investor with diversification through a single fund.

There's just one problem: These funds can get darn expensive. Thankfully, the SEC has moved in this year to require increased disclosure to let investors know just how expensive these funds really are. This is particularly important, as these funds are becoming more and more popular as the default choice for 401(k) plans. According to the Journal:

The move is an important change intended to provide investors with a fuller picture of these products' costs. It's also a rude awakening for many investors -- because the numbers show that they may have been paying a lot more for these funds than they thought.

The reason: Historically, funds-of-funds showed an expense figure that didn't always include the fees of the underlying funds. Now these expenses can be seen in a line in the prospectus typically called "Acquired Fund Fees and Expenses," or AFFE. The new rules took effect for prospectuses filed starting January.

The new disclosure rules are exposing some pretty expensive funds: The UBS Multi-Strat Fund, showed a 12.11% total annual expense last year, compared with about 2% for the prior year. The increase was a result of the new disclosure of AFFE.

It's a good thing investors have this information now because I suspect that very few sane people would invest in a fund with an expense ratio of 12.11% given that that's a few percentage points better than the historic return of the market.

If you are going to invest in these funds of funds, be sure to look for a reasonable expense ratio.

SEC Chairman Chris Cox called on the mutual fund industry to join him in the "war on complexity." Cox discussed the difficulties that investors have in comparing mutual funds using the SEC's Edgar Database. He also called for more disclosures about 401(k) fees and performance, saying that "We will continue to purge all the legalese and convert it to plain English. But getting rid of the gobbledygook is no easy task. But we want to give every investor the info to achieve sound investment decisions."

I'm highly skeptical about the odds of mutual funds making it easier for investors to compare expenses and performance because, if they did, most people wouldn't buy most mutual funds. If people had a solid understanding of mutual funds and the factors impacting their performance, pretty much everyone would buy the lowest cost index fund they could find. Needless to say, that wouldn't be good news for most investment management companies.

However, instead of complex disclosures and spreadsheets that 99% of individual investors really don't care about, I have a plan. Every mailing/advertisement/prospectus discussing a mutual fund should be required to contain a red piece of paper with the following:

DEAR INVESTOR:

Most likely, the mutual fund that is soliciting your business brags about its track record and its management team's expertise. As an investor, there's something you need to know: None of that matters.

Past performance, Ivy League credentials, and colorful promotional literature have very little impact on a fund's future performance. Here's what matters: The expense ratio. By keeping your costs as low as possible, you will beat more than 80% of actively managed funds.

Investment legends including Warren Buffett, John Bogle, and Burton Malkiel (to say nothing of Ben Stein and Suze Orman) have all said that most investors should stick with passively managed, low-cost index mutual funds. If the fund being advertised here does not fit that description, we strongly advise you to toss the mailing into your recycling bin.

Best of luck in your pursuit of wealth.

Your Friends at the Securities and Exchange Commission