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Inside the Numbers: Why Every 401k Fiduciary Must Read This Report

December 16
23:37 2009

No school exists for the 401k fiduciary to obtain a real education in the subject. Well, strike that. There is the school of hard knocks – learning by doing. One of the best ways to avoid those hard raps on the head and still come away with 466348_22078454_ruler_pencil_compass_stock_xchng_royalty_free_300sound training, though, rests in picking and emulating appropriate role models. How does the 401k fiduciary do this? A growing and independent provider of 401k ratings and financial intelligence to plan sponsors, advisors, and participants from the west coast may have just provided the answer.

On December 8, 2009, BrightScope, Inc. – a two-year San Diego-based company that has taken 2009 by storm with near universal acclaim – announced the Top 30 401k Plans of 2009. Although focused on larger companies, the BrightScope 2009 Top 30 401k Plans List represents a must read for all 401k fiduciaries. It provides a solid foundation on which to begin to measure such plans.

FiduciaryNews.com caught up with Mike Alfred, CEO and co-founder and asked him a few questions to which he graciously responded:

FN: What do you hope to achieve by offering this Top 30 list?
Alfred: The Top 30 list is an opportunity to recognize companies that have done an outstanding job designing 401k plans that drive successful retirement outcomes for their employees. For too many years, 401k plans have offered nothing but downside to employers who choose to sponsor them. BrightScope restores the upside by offering an independent and quantitative validation of great plan design and sound fiduciary practices.

FN: Who should pay attention to the Top 30 list?
Alfred: Plan Sponsors can learn a lot about best practices by studying the plans on the Top 30 list. The Top 30 list can also help participants become more aware of the vast discrepancies in plan quality even with plans of employers in the same industry. Top advisors can showcase the quality of their work if they are lucky enough to have a plan on the list.

FN: Where can 401k fiduciaries find more information about the Top 30 list?
Alfred: The best place to start is by going to our blogpost on the list found here: http://www.brightscope.com/blog/2009/12/08/brightscope-2009-top-30-401k-plans-list/

FN: Why should the 401k fiduciary want to appear on the Top 30 list?
Alfred: In a world where traditional pensions are going away, the 401k plan has become the primary source of America’s retirement savings. Many top employers who have in the past attracted and retained employees by highlighting the quality of their pension plan are now forced to find ways to independently validate the quality of their 401k plan. Being included on BrightScope’s Top 30 list and more generally having a high BrightScope rating is probably one of the best ways to do that. Several of the employers included on the list notified their employees of the award through their internal company intranets and BrightScope received quite a bit of traffic through those channels.

FN: What time period does the Top 30 list cover?
Alfred: We will release our BrightScope Top Plans list at the end of each year with the most recent data available on those plans. Going forward the data will be closer and closer to real-time as more top employers provide the data directly to BrightScope on an ongoing basis. [Editor’s Note: According to the Brightscope release, the data was through 12/31/07. The release now includes this important update: *UPDATE: In 2009, both Motorola (effective January 1st, 2009) and Fedex (suspended effective February 1st, 2009/ re-instated effective 1/1/2010) suspended their 401k matching contributions, potentially hurting their likelihood of being included in future lists.]

FN: How could the typical 401k fiduciary improve their plan’s position on the Top 30 list?
Alfred: Focus on driving up plan funding levels. Education and communication campaigns designed to increase participation and salary deferrals are always a good place to start. In addition, a sponsor might consider introducing auto-enrollment and other auto features. It’s hard in this environment but increasing the match will always increase the BrightScope rating, sometimes significantly.

FN: This is the first year you’ve done this. What have you discovered about the rating process that you might be able to improve on next year?
Alfred: We’re intensely focused on accurately measuring participant outcomes. I think we’ve struck a chord with the marketplace because we’re looking at the 401k through the lens of a participant. We’re always looking to improve but going in to 2010 we’re confident that we have the best methodology for measuring plan quality and will only be making subtle updates, not wholesale changes.

FN: The Top 30 list focuses on large plans, how would smaller plans be measured?
Alfred: Surprisingly, there are tiny plans of under $2M in assets that outperform some of the largest plans in the country in some key areas. We’ve seen a couple of these micro plans with a lower total plan cost per participant than IBM. So, there are certainly great examples of small plans that do a tremendous job for their participants and I don’t think any plan sponsor or advisor should feel they are doomed to have a bad plan simply because they are small.

FN: Overall, what one area do you see the best plans doing the best at?
Alfred: I can’t select just one area that these plans do well. Generally, they are doing very well at encouraging high participation and salary deferrals while designing plans with low fees and a robust match. On the other hand, they are all over the map when it comes to the investment menu. The investment menu is the primary focus of most people in the marketplace even though our research shows that on average it has at best a second or third order effect on participant outcomes.

FN: Similarly, what one area do you see the best plans having the most opportunity to improve?
Alfred: Pretty much all of the plans on the Top 30 list could do a much better job with benchmarking and communications. When benchmarking is being done, it’s based on flawed survey data from providers that also provide recordkeeping, investment selection services, and other plan services. Plan sponsors need to purchase benchmarking data and solutions from independent and unbiased third parties because that is the only way they can trust that the data isn’t being used to obscure total plan costs. On the same token, even the most proactive plan sponsors are missing the opportunity to provide independent third party data to their participants that can validate their approach to managing the plan. In our conversations with several Fortune 100 sponsors in the last few months, we’ve heard these two issues come up over and over again and I think that means more employers will be making changes in these areas in 2010.

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Christopher Carosa, CTFA

Christopher Carosa, CTFA

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