Imagine Yourself as the 401(k) Plan Sponsor

From the investing trenches, it is easy to criticize your 401(k) plan.  If you have done poorly, you tend to blame the ability of the plan to provide to you the right tools to be successful, the right platform upon which to build your retirement future and do all of that with an eye on fiduciary responsibility, fees and costs.  If you have done well, and to judge that you might look at your account balance alone, you tend to take a could-care-less attitude, not because you don’t but instead because you are so much farther along that your peer group.

But in reality, how does a 401(k) plan get rated?  Once you try to understand the process where by the complicated mechanism of participation and company-encouraged involvement come into play, you open the door to wonder whether if the plan was better, would more people use it?  Cynics will wonder if the plan is so good, based on performance and participation, does that mean it is good for everyone in the plan?

There are numerous layers of data and information in every plan.  Sifting through them is difficult for you and triply so for those trying to decide which plan is better and how can they improve the plan they have.

In a perfect world, companies would have a robust amount of offerings for its employees at a low cost and across a wide variety of investment choices.  They would match contributions and they would do so without any pressure to buy the company stock.  The plan would offer advice and education to its participants and if needed, intervene with employees who did not take advantage of the plan.  It could offer plan participation (enrollment) at an earlier date and do so with the match attached.

But it is not a perfect world.  So why do we demand the measure of these plans to also be perfect?  I profiled a company called BrightScope as it came out of the gates with a revolutionary idea: rate the 401(k) plans of our employers much the way Morningstar rates mutual funds. To do this, it would have to backward looking.  Morningstar rates funds not on a day-today basis based on what they are holding at the moment you read their reports. (Most of us don’t go far beyond the style box, the stars and perhaps the fees versus performance.)

BrightScope has an even tougher time.  The information they are looking at is back-dated as well. But how far back is too far? To their credit, BrightScope does use all of the perfect-world scenarios suggested above basing their free to the public rating system of 35,000 private sector plans on how long the average account balance will last into retirement.  They believe that if the plan can provide 70% of the current income of the employee at retirement, it will have done its job.

Even by their own admission, the plan isn’t overwhelmingly focused or interested in the performance of the plan so much as the participation of the employee.  If they are putting money in at a steady rate, the reasons for such actions are simple: the plan must be good, the company must believe in it and the costs must be reasonable.

BrightScope might be over-emphasizing the cost structure of the plan’s offerings too much, some critics note.  Their ideal plan has more index funds than most, which drives cost down but doesn’t necessarily provide the returns needed (that index vs actively managed fund debate won’t be fought here at this point).

The idea is to give employees the opportunity to suggest to their employer that their plan may not be all that it could be. Using BrightScope’s comparisons of similar companies, employees, at least theoretically, could use BrightScope as evidence that they could be doing better.  But could they?

Several things have come to light since the introduction of this product.  One, the data might be too dated to be of any real use. This is not really BrightScopes fault since they use company filed forms (the plan’s annual Form 5500 filing) and they are two years out-of-date.  They could be faulted for not necessarily telling you that the info presented is sort of old.

Jon Chambers, Principal at Schultz Collins Lawson Chambers, Inc. and who is not a client of BrightScope yet does defend their professionalism when they are called out for some error they might have made writes: “Brightscope has elected to take a relatively aggressive position to their benchmarking, both in terms of fee presentation (including estimated trading costs is, in my opinion, unusual and aggressive), and overall plan competitiveness (comparing plans relative to a “hypothetical” best in class plan serves to depress ratings for most plans.” That will change when plan’s begin to file electronically bringing the reports BrightScope offers to a greater degree of relevancy.

This will also improve their transparency as well.  The company wants to be a benchmark and strives to do so as accurately as possible.  But it isn’t always that easy to do.

Consider a point Tom O’Shaunessey, Principal- Director of Marketing & Sales at Hunter Benefits Consulting Group, Inc. in Chicago made recently. He describes the chaotic and confusing world at the source of the plan you use by suggesting how much one small misstep can cost everyone including the participant.  His job is to fix those mistakes.  He offers an example of company employee charged with making sure compliance is in order who failed to fill out a questionaire correctly:  ”someone has to fix it and the advisor blames the vendor who blames the sponsor who blames the advisor and eventually someone brings it to my people to fix it. That is to say, the vendor or consultant tells the client to ask their CPA who usually refers the case to me because he or she can’t fix the problems for anywhere close to what I charge.”

BrightScope cannot fix sudden changes in the way employers treat their plans.  A huge addition or subtraction in the most recent year in terms of matches will not show up until the following year. As Kathleen Pender, who writes a Net Worth column for the San Francisco Chronicle suggests: “Like any data-intensive project, BrightScope’s information is not 100 percent accurate.”

For now, that’s okay.  And as BrightScope continues to evolve chasing the continually evolving plan world, it will one day come close enough to allow employees to ask for more from the plan’s they have.  A lot will depend on the health of the company itself (whether it can increase contributions or lessen the requirement of buy-our-stock-to-get-the match, which makes their plan less attractive even if participation and account balances are higher than average) and of course the size of the firm.  Employees should be careful when making comparisons as well.

Until then, BrightScope might be criticized for a variety of items in its attempts to be the benchmark of choice but it seems to be making every effort to eventually become the be-all-to-end-all.

Read more from Ms. Pender: http://www.sfgate.com/cgi-bin/article.cgi?f=%2Fc%2Fa%2F2010%2F04%2F11%2FBUE31CQKC3.DTL#ixzz0vT71UNRP

Related posts:

1. The Nuanced IPS: You, Your Plan Sponsor, and Retirement
2. A Plan Sponsor’s Responsibility: Lifetime Income Distribution Option
3. Brightscope Does it Again
4. Retirement Planning: Not Your Mother’s Retirement Plan
5. Your 401(k): Plan Sponsors Worry