Your 401(k) Plan’s Online Report Card — and What to do About It
Since 2009, a company called Brightscope has been compiling data on plan assets from retirement plan tax returns (Form 5500s) and providing on-line “scores” on plan investment performance, as measured against industry peers. I am surprised how often clients and even colleagues in the benefits world are unaware that this data is publicly available, and not just for larger ($10 million + in assets) retirement plans.
That is because, in addition to “scoring” retirement plan investment performance (including the impact of administrative and investment expenses), Brightscope translates poor investment performance into what it “costs” a hypothetical plan participant, in real dollar terms.
So, for instance, the Brightscope rating for a plan with a performance score of “60” as measured against its top-rated industry peer’s score of 84 will also state that this 24-point lag in scoring will “cost the average 401(k) plan participant” an additional 10 years of work, and up to $67,000 in lost retirement savings. Brightscope separately explains its statistical methodology, which assumes an “average participant” who is a 44-year-old, gender-neutral individual, earning an income of $44,000 a year, with a starting account balance of $40,000. However readers have to dig a bit for this information, and in the mean time the initial negative impact the numbers could make on a plan participant is considerable.
Brightscope also invites those “average 401(k) plan participants” who are not happy about their plan’s performance to “Help Improve this Plan” (by contacting the employer and other participants) and “Track this Plan” (by receiving updated plan performance data). It also provides a summary of participants’ legal rights under ERISA.
Needless to say, Brightscope is packaging information in a way that invites employees to challenge employers about plan investment performance, fees, and plan design. This is a timely development given the Department of Labor’s current (long-overdue) focus on fee disclosure regulations at both the plan- and participant-level. In fact some of the information Brightscope shares has always been required to be communicated to employees annually under existing Department of Labor regulations, in the form of a Summary Annual Report (SAR). Obviously, Brightscope is a boon to employers whose plans are at or near the top score for their respective industry. But what does it mean for employers whose plans are at the other end of the spectrum? If handled properly, a low Brightscope rating does not have to be an employee-relations disaster.
First, I recommend that clients periodically check their plan’s information on Brightscope. Originally only larger plans with $10 million in assets or more were rated, but Brightscope is adding ratings on smaller plans every day. (And for smaller plans without a rating, Brightscope conveniently summarizes information from the plan’s latest Form 5500 data, including beginning- and end-of-year plan asset totals, and responses to questions about fiduciary breaches.)
Second, employers can challenge the methods by which Brightscope derives its ratings (by following prcedures described in the FAQ) and this is appropriate to correct an obvious error in plan data. Absent that, however, I don’t think it is helpful for an employer with a low rating to go on the defensive this way. It is better for the employer to confront the low score head-on, share their Brightscope rating with their investment advisor, and take steps to address the source problem, which may be higher than average costs/fees, low-performing mutual funds, or both. It won’t be possible to immediately close a 20-point gap in scoring, but it is possible to answer complaints on the current score by saying that the company is aware of it and is taking steps to improve the situation.
For more information about how Brightscope came about, other ventures its founders are working on, and its perception in the retirement plan industry, I recommend this New York Times article.