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Exclusive Interview with BrightScope, Inc. Co-Founder Mike Alfred on Rating Target Date Funds.

November 10
08:30 2009

On November 2, 401k Ratings Firm BrightScope announced it was partnering with Target Date Analytics LLC to promote a new index: the BrightScope On Target Index. The intention is to establish a national standard target date benchmark for the 401k industry. The San Diego, Calif.-based 401(k) data and analytics firm BrightScope, which rates 401(k) plans, went live in January and now has more than 16,500 plans in its database. BrightScope co-Founder and CEO Mike Alfred graciously consented to an exclusive interview with FiduciaryNews in between meetings in Washington DC.

Mike Alfred

FN: Clearly there has been some demand for this kind of service. How do you pick up on this demand?

Alfred: Plan sponsors who were with us already wanted a more robust way to analyze. Our dashboard didn’t already have Target Date analysis. With the current growth in the use of Target Date funds among 401k plans, there is a clear need in the marketplace for an independent index.

FN: What’s the one thing that most impresses you about Target Date Analytics?

Alfred: We spent about 9 months vetting the various providers in the marketplace. We thought Target Date Analytics looked at data from the fiduciary standpoint. In the end, our analysis is very conservative and we liked the methodology of Target Date Analytics better than that of others.

FN: What’s different about the BrightScope On Target Index?

Alfred: We feel users would have lost a lot less money had this index been available. Not only does the index address fiduciary concerns, but it also incorporates actual participant behavior.

FN: How does this address specific fiduciary concerns?

Alfred: Matt Hutcheson says prudence is an environment of loyalty. The plan sponsor always has to be thinking “how are my decisions about this plan going to impact my participants.” They need to use benchmarks that best help their participants. It seems like funds out there are designed to maximize the profit of the fund adviser, who, by the way, is not a fiduciary.

FN: How do consider actual participant behavior?

Alfred: We look at studies. People who are approaching retirement have certain expectations. In addition, actual behavior suggests people are more likely to cash out at the time of retirement. With most target date funds today, the glide path only gets conservative 20 years after the target date, not on the target date – when most participants actually cash out. The BrightScope Target Date Index is a “to-index,” not a “through-index.” We really agree with what Fred Reish has to say on this.

FN: There seems to a lot of controversy, how would this index help address this controversy?

Alfred: From our perspective, there needs to be a separation of duties to remove conflicts of interest. We’re not creating products, so we don’t have an incentive to keep recommending higher equity proportions. As you know, advisers generally receive higher fees for equity management than for fixed income management. In addition, we aren’t trying to sell ancillary products. We’re just providing independent data.

FN: Given the controversy surrounding the funds, do you see a time where the DOL removes Target Date Funds from their approved list of default investments for 401k plans?

Alfred: I don’t see the DOL talking it off its approved list because there’s too much money involved. Target Date Funds are the fastest growing product within the 401k market and it will only get bigger. There is too much vested interest in Target Date Funds for the DOL to remove them without seriously disrupting things.

FN: Do you see anything coming out Congress regarding Target Date Funds?

Alfred: No, the same people dealing with Target Date Funds are also working on Health Care, which seems to be the priority. I do believe people in the market place need a better index. If you’re waiting around for the government, you could be waiting for a long time.

FN: Mike, thanks for taking the time to speak to FiduciaryNews.com about Target Date Funds.

Alfred: I’m glad to see people talking about these issues. Thanks.

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Christopher Carosa, CTFA

Christopher Carosa, CTFA

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