Rating Your 401(k)

Does your company’s 401(k) stack up against retirement savings plans offered by your competitors? Do your employees pay higher-than-average fees?

You might not know the answers, but BrightScope does. The San Diego startup has rated retirement savings plans at more than 55,000 U.S. employers based on factors such as costs, investment menu quality, “company generosity” and other criteria, and makes its findings available free on its website.

New rating services such as Brightscope and Portland, Oregon-based Fiduciary Benchmarks Inc. have become popular among retirement plan advisors, who use them to identify potential clients.

Companies are finding the rating services tool useful, too. One is GDS Associates, a Marietta, Georgia, engineering and consulting firm with 170 employees. “We were always under the assumption that our plan was very generous and very good,” says Robert Smith, a GDS vice president and partner, and a trustee for its 401(k) plan. “I thought it was important to find out how it was being evaluated by an independent party and how we match up against other companies like ours.”

Stacking Up
As it turns out, GDS matches up well. Brightscope rates the company’s 401(k) plan 84 on a scale of 0 to 100, putting it in the top 15 percent of plans in its peer group. GDS’ 401(k) ranks “great” or “above average” in five of six key areas, including company generosity. The only area where it scores below average is cost, which disturbs Smith. “My participants can see this as well as I can,” he says.

For now, Smith hasn’t endorsed changing the 401(k) plan, but only because he’s not certain costs are too high. His plan provider, a major insurance company, insists costs are what they should be for a plan of GDS’ size. Smith says that because of the way the provider reports information on fees, it’s possible Brightscope double-counted some costs. While he looks into the matter, he’s put his provider on notice that his company is exploring all of its options. Brightscope co-founder and CEO Mike Alfred declined to comment on the GDS plan specifically. Alfred says his firm has made several efforts to resolve cost-reporting issues it has with that plan’s provider, though it has never reached a positive resolution.

Meanwhile, GDS’ plan advisor reduced its fee since being presented with the Brightscope data. “I don’t know if it was because of pressure they were getting from me,” Smith says, “or simply because our fund was getting bigger.”

Other companies are making changes to their 401(k) plans based on Brightscope’s findings.

Millennium Investment & Retirement Advisors is working with a Raleigh, North Carolina, company that hired the 401(k) consultant after learning of its low Brightscope rating. To reduce costs and diversify the 401(k) plan’s investments, Millennium is getting rid of retail-class mutual funds in favor of lower-cost institutional funds. Millennium also is adding international and bond funds for the company, which Rick Canipe, Millennium’s president, declined to name for privacy reasons. “Total investment management fees will probably be cut in half,” he says.

How 401(k) Ratings Services Work
Just a few years ago, there was no easy or inexpensive way for companies to compare their retirement savings plans to what their peers offered. Employees certainly didn’t know how to either.

Brightscope and Fiduciary Benchmarks set out to change that, although the two firms take different approaches to the task.

Brightscope collects data on more than 600,000 401(k) and 403(b) plans. The company claims to have complete details on investment lineups and fees for more than 55,000 of those plans, a group that collectively controls nearly 90 percent of assets held in all the plans it tracks.

Brightscope culls much of its data from the annual Form 5500 retirement plan reports companies must file with the Internal Revenue Service. Critics complain that data is typically a year or two old by the time it’s publicly available. Brightscope says plan sponsors can submit more recent data, and Alfred says thousands have done so.

Fiduciary Benchmarks doesn’t consider the total plans it tracks a key metric. Even so, CEO and co-founder Tom Kmak says Fiduciary Benchmark will produce thousands of benchmarking reports for clients this year, each measured against 25 similar plans using data from 10 different record keepers.

Fiduciary Benchmarks collects data from a variety of sources, including retirement plan administrators, brokerage firms, mutual fund companies and other recordkeepers, and says information it uses is always less than three months old. The company claims its reports include not just cost metrics but value metrics, since costs shouldn’t be considered in isolation.

An Easy Decision
For companies, using Brightscope’s free website makes a lot of sense, if only to respond to employees’ questions about what they learn there. And if companies spot erroneous information, they can ask Brightscope to correct it. Companies with highly rated plans can use that information to retain current employees or promote themselves to prospective hires.

Companies can also use the information Brightscope provides to improve their plans. That could head off future litigation if, for example, employees one day concluded that a plan’s high fees or substandard investment options represented a company’s failure to act in its workers’ best interest, a fiduciary duty under the Employee Retirement Income Security Act,. It also could improve the financial lot of the company’s owners and executives. As participants in the plan, they want to be sure they’re getting access to a diverse menu of solid investment options at a fair price, too.

“Our 401(k) plan is the only plan we offer for retirement,” GDS’ Smith says. “We’re a private company, and our ownership here would not be worth significant dollars unless our company was purchased. So this is it.”

Companies also can pay Brightscope a fee for a more detailed analysis of how their plan measures up. A subscription-based dashboard service provides exact scores on six major ratings components, and detailed cost information on each investment option in a plan. The service allows subscribers to rate themselves against eight specific peer companies, and change those companies periodically as they wish. The cost of the service ranges from $1,500 annually for plans with assets of less than $5 million to $20,000 annually for plans with assets of $10 billion or more. Companies can buy a one-time report with that same information for $500 to $5,000 depending upon plan size. For $1,000 to $10,000, depending upon plan size, they also can buy a competitive analysis that goes into greater detail on specific plan attributes.

Whatever 401(k) rating service a company chooses, it should be mindful of how other benefits provided could affects its 401(k) rating. For example, a company that offers a traditional defined benefit pension plan in addition to a 401(k) plan may be less generous than others in matching employee contributions to the 401(k). That could be the sole reason its 401(k) doesn’t rate well against its peers.

What’s more, there’s no precise point that distinguishes a good and bad rating. “I wouldn’t want to be significantly below the average rating for your peer group, though,” Alfred says. “It means you’re not doing a very good job of creating an environment where employees will get to a comfortable retirement.”

That may be true, depending on factors behind that rating. Still, knowing your Brightscope rating is a convenient first step in figuring out whether a retirement savings plan is working as hard for your employees as it should.