Posted on 04 March 2010
By Mark Miller
No one is immune to the stock market’s ups and downs. But if you participate in United Airlines’ 401(k) plan, you’ve got a better shot at reaching your retirement goals than the workers at American Airlines. Programmers at Google have better odds than the cashiers at Whole Foods or Wal-Mart. And Verizon workers are ahead of their competitors at T-Mobile.
All 401(k) plans are not created equal. Some employers are more generous with matching contributions; others sponsor plans with mediocre investment choices. And some employees pay much higher plan fees than others. But there hasn’t been much transparency that would help employees–and employers–compare performance against other plans.
That’s why a start-up company called Brightscope is making a splash. The company has assembled the industry’s most comprehensive database of 401(k) performance. They’re assigning a simple numerical rating to all the plans–including the ones mentioned above–and making the scores available to investors for free.
Brightscope isn’t the first to measure 401(k) performance but it’s gone deeper than most by accessing the audit reports that all plans file with the U.S. Department of Labor, as well as other data sources. Currently, Brightscope offers ratings on 35,000 plans, covering more than 60 percent of all employees and more than half of all assets in plans.
“We want to make the data much more transparent,” says Mike Alfred, Brightscope’s CEO and co-founder. “The fact that it took a little start-up in San Diego to pull out this data in an industry that has been around for 25 years tells you just how inefficient the market is.”
Brightscope uses more than 200 data points to measure plans, including total plan cost, the generosity of a company’s match and investment choices.
The result is an overall numerical score on a 1-100 scale. You can log on to Brightscope.com to see how your plan rates.
But Brightscope also runs the plan data against a standardized profile of a hypothetical, average 401(k) participant–a 44-year-old (gender neutral) individual earning $44,000 a year with a starting account balance of $40,000.
On the website, you can view an actuarial calculation showing how much longer that hypothetical worker must work to hit a retirement goal compared with the top-ranked plan in the Brightscope rankings.
Unseen fees charged to investors in plans are one of the biggest variables in fund performance, Alfred says, especially at smaller companies. These include investment product fees, administration and record-keeping fees and other fees for investment advisory services, insurance and auditing.
Brightscope’s data shows that average 401k total plan cost can be as low as 0.20 percent of assets for the largest plans and a whopping 5 percent for smaller plans. “The biggest problems are at the small end of the market,” Alfred says. “If you’re in a plan with more than a billion dollars in assets, the fees are going to be competitive.”
A 2006 report to Congress by the U.S. Government Accountability Office (GAO) found that fees can make a huge difference in long-term return: a one-percentage point increase in fees reduced return over a 20-year period on a typical portfolio by 17 percent.
Brightscope hopes greater transparency will pressure plan sponsors and financial services companies to tighten up inefficient plans. And the Obama administration’s Middle Class Task Force recently proposed adopting reforms that would bring greater transparency to reporting on 401(k) fees.
What to do if you’re stuck in a bad 401(k) plan? First, don’t underestimate the value of tax-deferred workplace saving. If you have an employer match, that’s found money. And, you still can save more tax-sheltered money in a 401(k) than you can in an IRA–the maximum this year is $16,500, and another $5,500 if you’re over age 50.
But if your plan’s fees are ultra-high, you may want to consider contributing only enough to meet your employer’s match, and contribute the rest to a lower-fee IRA, Roth or taxable account. (With a traditional IRA or Roth, your annual contribution limit this year is $5,000, or $6,000 if you’re over age 50.)
Finally, if you fund yourself in under-performing funds, check to see if your plan offers a no-load index fund, which usually matches market performance.