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BrightScope Shines a Light on 401(k) Plans

The company’s rating system gives employees insights into brokerage and other plan fees. Employers and plan advisors are taking notice.

March 10, 2010
Related Topics: Retirement/Pensions, Benefit Design and Communication, Compensation
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When BrightScope marked its first anniversary in January 2010, co-founders Mike and Ryan Alfred had reason to celebrate.

A year ago, the brothers set out to create an independent rating system for 401(k)s patterned after Morningstar, the popular mutual fund rating service. By the end of 2009, their San Diego startup had analyzed 34,000 plans—almost half of all 401(k)s in the country with more than 100 participants.

Not only that, the company raised $2.9 million in venture financing and racked up glowing reviews in the nation’s business press. At the same time, the duo—Wall Street wunderkinds who played the stock market in college and previously worked in investment banking—became sought-after commentators on the 401(k) industry.

Their timing couldn’t have been better. BrightScope’s aim to bring a new level of clarity to 401(k)s comes as more employees than ever are using the plans to save for retirement and the federal government is encouraging mandatory enrollment. At the same time, workers are worried about the hit their 401(k) plans took in the recession, and companies are under increased scrutiny to be more forthcoming about plan fees.

“It boils down to transparency. The whole industry is better served the more transparent things are,” and BrightScope is making that happen, says Stephen Rosenberg, an ERISA litigator who represents mainly corporate clients.

That’s the point, says Mike Alfred, BrightScope’s CEO. “Now there’s data someone can point to and say, ‘Look, there’s an independent party telling me it’s not doing well.’ It’s not just someone at the water cooler; it’s backed by real data.”

According to an October 2009 report from the Government Accountability Office, 49 million U.S. workers currently participate in some type of defined-contribution plan, and 85 percent of them are in 401(k) plans. In the same report, the GAO found that individuals may not be aware of the impact investment fees and other “hidden” fees may have on their retirement savings.

Over the past few years, dissatisfaction with 401(k) plans and plan fees has led to class actions and other lawsuits against major corporations such as Lockheed Martin, Boeing and Wal-Mart.

The lawsuits proliferated because historically, plan sponsors haven’t done a good job explaining plan fees, regardless of whether the expenses were justified, Rosenberg says. “It was a closed system and plan participants didn’t know about it.”

The recession intensified the problem. “It wasn’t any different when the market was booming, but people didn’t care about a few percentage points when their 401(k) was going up 15 percent a year,” Rosenberg says. “But when their account balances are going down 40 or 50 percent a year, suddenly they were very concerned.”

Cutting through the fog of plan fees

Against this backdrop, BrightScope provides clear information on how plans are managed and the fees that workers pay for those services. For its rating system, BrightScope created a software program that analyzes 200 data points—including total plan cost, company generosity and investment menu quality—to come up with a single score between 0 and 100. Each plan’s profile page also shows its total assets and participants, average holdings, largest investments and plan service providers.

Employees can use BrightScope’s free Web site to look up their companies’ 401(k) plan ratings and compare them against other companies in their industry. If, for example, Southwest Airlines employees visited the site, they’d see that the Southwest Airlines Co. 401k Plan earned a mid-industry rating of 71, higher than Northwest Airlines Retirement Savings Plan for Contract Employees (69.8) or Continental Airlines, Inc. 401k Savings Plan (58) but lower than United Airlines parent company UAL Corp.’s retirement plan for pilots (90). Registered users can use an online “vault” to store information specific to their own plan, see how much they’re paying in brokerage commissions and other fees, and share comments.

BrightScope subsidizes its free service by charging for two in-depth analytical tools: one for $7,500 to $50,000 that companies can use to create customized reports, and another for $5,000 to $12,000 that plan advisors can use to target prospective clients. The company also started selling advertising space on its site in mid-February. Mike Alfred expects sales to push the company into the black by the second quarter of 2010.

Despite its initial successes, BrightScope is just beginning to have an impact on plan sponsors.

The company says it has signed up a number of Fortune 1,000 companies—it won’t say how many—for its paid service. Among them is Lockheed Martin. A Lockheed Martin corporate spokesman declined to comment. But in an endorsement prominently displayed on BrightScope’s site, George Keagle, Lockheed Martin’s benefits director, calls the service “a way for employees, reporters and others to understand the true value of this important benefit to our employees.”

BrightScope still gets most of its data from the annual 401(k) audits that companies with more than 100 plan participants are required to file with the Department of Labor’s Employee Benefits Security Administration. Because new information isn’t always readily available from that agency, some of the data on which BrightScope bases its ratings are two or more years old.

But that could be changing. The company’s early track record has persuaded some companies to transmit 401(k) plan data directly to BrightScope, which will result in more up-to-data information in coming months, Alfred says.

Traffic to BrightScope’s site is still light. According to BrightScope officials, the site had 121,000 unique visitors and 724,000 page views in January, compared with 6.4 million unique visitors the same month at mutual fund giant Fidelity.com. On BrightScope.com, the most popular 401(k) plan profiles—Lockheed Martin, FMR Corp. (Fidelity), Google and Saudi Arabian Oil—get between 2,000 and 3,000 page views a month.

“Not all of these page views are from employees, but there is no way the numbers would be so high unless a lot of them are,” Alfred says.

Retirement plan advisors are cheerleaders

All of that activity encourages BrightScope supporters, who maintain that when it comes to 401(k) plans, companies are typically slow to change. Expect to see more employers making adjustments to their retirement plans because of BrightScope, “simply because they’re stirring the pot,” says Kristofer Gray, a retirement-plan manager for small and midsize businesses. “In the next year it’ll become a kind of litmus test as to how astute someone is on their 401(k) plan,” says Gray, owner of Integrity Financial Corp. in Bellevue, Washington.

Retirement plan consultants such as Gray have good reason to be among BrightScope’s biggest cheerleaders. They’ve realized they can use the ratings as a measuring stick of their own work. If plans they develop for clients show up at the top of BrightScope’s 100-point system, it makes them look good to prospective customers. Gray doesn’t hide the fact he relies on it. “It gives us a lot of credibility in an industry that’s been deeply entrenched with good old boys,” he says.

One customer Gray has introduced to BrightScope is still getting a feel for the service. Marc Hutchinson, managing partner at Bashey, Hutchinson & Walter, a 20-employee Bellevue CPA firm, plans to discuss it with the 14 employees who are in the company’s 401(k) plan, especially since BrightScope rated it "above average" for its peer group. Having a good retirement plan, and having an outside rating service confirm that, is one of the things Hutchinson says he uses to attract top talent.

In January 2009, Mike and Ryan Alfred and a handful of employees first started compiling 401(k) plan data in Excel spreadsheets. With $900,000 in prelaunch angel financing and an additional $2 million raised in summer 2009, the company built its analytical tool and increased its staff to 22. By late December 2009, the company was adding an average of 500 plans a day to its database, according to Mike Alfred. Before they’re done, he hopes to rate every plan in the country, which would be the critical mass necessary to get major plan managers such as Fidelity and Vanguard to pipe him data directly.

In recent months, the Alfred brothers have used BrightScope to speak out on certain industry practices, specifically the use of target-date mutual funds, funds with an investment mix that becomes more conservative the closer someone gets to retiring.

In February, the Alfreds used the company’s blog to take issue with a major investment industry trade group’s defense of the funds, which got slammed during the recession and more recently have become the target of a Securities and Exchange Commission investigation. The Alfred brothers also provided research and technical assistance for briefing on target-date funds last fall by a U.S. Senate special committee on aging. Ryan Alfred, who heads the company’s research efforts, is working on an undisclosed project with the nonprofit Employee Benefit Research Institute.

Mike Alfred is realistic about how much pull services such as BrightScope can have on average 401(k) participants, which according to reports from the GAO and others, don’t do as well as they could when it comes to investment choices and how much they invest.

“I’d like to believe the way we make data on our site easy to understand can help, but I don’t think we can solve the problem ourselves,” he says. “Apathy is a huge problem, even more than financial literacy. If they’re illiterate, they can become financially literate. But if they’re apathetic, I don’t think any amount of financial literacy will help.”

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