San Diego-based BrightScope, a data analytics software firm that quantitatively rates 401k plans, announced the release today of a new 401k fee product – the 
Personal 401k Fee Report. If you’re a typical 401k plan sponsor or fiduciary, you’ve no doubt read all the initial articles about this new product. Fiduciary News goes a little deeper to help reveal the answers to some of the more critical questions fiduciaries might have about BrightScope’s Personal Fee Report. We spoke to BrightScope co-Founder and CEO Mike Alfred yesterday about this new product.
Fiduciary News asked Alfred what prompted his company to offer this product. “For many years,” he told us, “participants have been advised to know and understand the pernicious effect that fees can have on their retirement balance but have never before been offered a solution.” In one way, BrightScope has leap-frogged over Congress, which has been talking about retirement plan fee disclosure for some time but has, to date, failed to act. On the other hand, the Supreme Court today refused to hear fee-related cases thrown out by lower courts (“Supreme Court Won’t Review 401k Suit Against Deere, Fidelity,” Investment News, January 19, 2010).
Nonetheless, the Department of Labor (DOL) continues to emphasize the importance of monitoring 401k plan fees (“Understanding Retirement Plan Fees And Expenses,” DOL Publication). One might wonder where BrightScope gets its fee information from. Financial columnist Steve Butler points out federal requirements do say more fee disclosure will be required as of 2009 filings, but those filings haven’t been made yet (“Hidden Fees on 401k Plans Deserve Light of Day,” San Jose Mercury News, January 18, 2010). Brightscope says it “possesses the largest private database of 401k information ever assembled.” The fee information, however, ranges from 2007 to 2010 depending on the plan, says Alfred.
Alfred goes on to explain that BrightScope includes “all fees that are return-reducing in nature, including fund level transaction costs.” He believes the industry has ignored these latter fees “despite their prominent role in determining retirement outcomes.”
Many will readily concede 12b-1 fees as well as mutual fund and ETF trading commissions ought to be included, but BrightScope takes the more controversial step of treating mutual fund and ETF expense ratios the same as out-of-pocket fees. While this might inspire questions among industry veterans, the DOL, in its 401(k) Plan Fee Disclosure Form, also includes mutual fund expense ratios (the form does not currently address ETF expense ratios).
Still, when asked how he might defend a charge of “double-counting” by including mutual fund expense ratios (which are already required to be included in a mutual fund’s reported investment performance), Alfred is quick to refute the claim. “It’s not double counting,” he says. “A fee is a fee, irrespective of the performance. The best predictor of long-term returns is fees, not past performance. We have a separate component called ‘investment menu quality’ that looks at performance. Unlike other more industry-focused benchmarks, we don’t measure fees alongside plan features or investment performance because we think that approach ultimately obfuscates total plan cost. We are entirely participant-focused.”
Although mutual fund fees are clearly disclosed, such is not the case for other common 401k investments like group annuities, common trust funds and stable value products. With these investment vehicles, fee disclosure has been a long standing issue. It’s often difficult for even professional consultants to get these fees. Alfred says, “In many cases, we know these fees precisely. In other cases, we leverage the collective intelligence of our database to build assumptions that typically peg the fees within 5% of what they actually are when fully disclosed.”
One piece of market intelligence Alfred shared with Fiduciary News deals with fees in bundled vs. unbundled plans. Alfred believes “Mega plans typically do a very good job of using their scale to create low cost plans. These mega plans are usually unbundled. But I think the fact they are low cost has more to do with their size than anything else.”
Alfred expects BrightScope’s fee tool to evolve over time. Perhaps plan participants may in the future be able to compare their fees with similarly sized companies so they can avoid any potential apples-to-oranges comparison. He also says of future products his firm plans to offer, “We’re going to be arming the top retirement plan advisors in the country with a suite of tools, starting with ‘Advisor Central,’ that will help them dramatically shorten their sales cycle, increase their win rates, and move upmarket.”
Chris, I like Brightscope, I think it’s a valuable tool, but trying to get a couple of my clients to use it has been difficult. They just don’t have, or won’t take, the time to do it. I wish Brightscope would allow advisors to somehow input the plans they advise on without disclosing the client’s name, thereby at least getting some benchmarking information. This would be a very valuable tool to me because I find the most difficult part of trying to build a 401(k) advisory practice is in getting the HR or CFO to focus on their responsibilities as a fiduciary. Being able to show someone the work we do with this service would be good. Right now, the only way to accomplish that is through Morningstar’s 401(k) module which, by the way, is a pretty good product.
My company, TSC, Inc., is a third party administration firm in the Minneapolis, MN area. We welcome fee disclosure and discussions about the ultimate retirement benefit achieved by participants. A few years ago we created a report entitled, The TSC401(k) Health Check, which uses actuarial assumptions to project what each participant will most likely receive each year in retirement. I would like to figure out a way to use BrightScope’s report in our TSC401(k) Health Check.
We administer (we do not sell any investment products) about 1,600 qualified retirement plans, many of which use group annuities as the primary investment vehicle. Granted, some of their fees are higher than others. What we view as important is the ultimate return for those fees.
The new Brightscope tool is a game changer for 401(k) investors. For the first time ever, they can receive an independent review of the fees they are being charged. The empowerment this brings participants will hopefully drive “bottom up” change in how a company manages and continues to improve their 401(k), specific to fees and participant asset allocation. One thing we shouldn’t forget, and to me a powerful detail of the service, is the report is supposed to be specific to their individual allocation. Thus, if their allocation is heavy in International, small cap, etc in actively managed funds, the tool could be considered a “behavioral” fee analysis as well.