Exclusive Interview with BrightScope’s Mike Alfred: Most 401k Plan Sponsors “Have No Idea…”
Last year, FiduciaryNews.com readers voted the emergence of the San Diego, CA-based 401k data and analytics firm BrightScope as the second biggest story in 2009. Since then, the company and its co-Founder/CEO Mike Alfred have continued to make news. Mike was kind enough to spend a few minutes with us last week. He’s spent a lot of hours in the trenches on behalf plan fiduciaries and investors and he’s kind enough to share with FiduciaryNews.com readers some of his real world experiences. His blunt comments may just shock 401k plan sponsors.
FN: Mike, belated congrats on your firm Brightscope earning the #2 spot among the top fiduciary stories in 2009 as selected by the readers of FiduciaryNews.com. A lot has happened in the industry since we last spoke six months ago, but, before we get to that, what’s new at your company?
Alfred: Thanks Chris. We are honored to be recognized for our work. BrightScope has grown very quickly and now employs nearly 30 people. It seems like almost everyone in the industry has reached out to us this year and we’re busy trying to build products that will satisfy the heavy demand for our data and software.
FN: That’s certainly thrilling news for you and your firm. And speaking of electrifying news, we’ve certainly had a lot of it on the fiduciary front so far this year. First, the Department of Labor (DOL) proposed a draft Investment Adviser Rule in February. It seems like this generated more excitement among service providers than among plan sponsors and investors – at least judging by who actually provided responses during the DOL comment period. Why do you think the folks who are supposed to benefit the most from the Investment Adviser Rule – plan sponsors and investors – remained so quiet?
Alfred: To be honest, I don’t think most plan sponsors and participants really understand which hat or hats their current service providers wear. So, to expect them to comment on a change they don’t understand would be asking far too much. The service providers know very well how their products are distributed and consequently have an acute economic interest in how this plays out.
FN: Do you have an insights on the DOL’s vetting process regarding the Investment Adviser Rule?
Alfred: No, this is not something that BrightScope has actively worked on. We did, however, put a lot of work into the House fee disclosure legislation. This did pass out of the House (inside of HR 4213), but we’re disappointed with the way things ultimately played out in the Senate. It’s a shame when something so obviously positive for investors is so easily defeated by lobbyists and other partisan interests. Perhaps it will find a better vehicle in the near future.
FN: The Financial Reform Act seems to have become much ado about nothing, but it does at least formalize the Fiduciary Standard debate. What do you think the SEC will end up concluding with their study and what changes do you foresee?
Alfred: The “fiduciary” issue has become so convoluted that I don’t think anyone can really be sure how it plays out. What is clear is that the fiduciary standard is a superior standard, at least when you consider it from the client’s point of view. Ask yourself if you’d want your grandmother receiving “advice” from a salesman or an actual adviser? If you’d prefer the salesman, you’re probably either a broker or just don’t care much for your grandmother. Of course, if you force a whole bunch of people who’ve been salespeople for 20 years to call themselves “fiduciaries”, that might create a whole new set of issues.
FN: The Wall Street Journal just ran a story on 12b-1 fees (“What Exactly Are 12b-1 Fees, Anyway?” Wall Street Journal, July 6, 2010), another issue the SEC plans to give some guidance on. Let’s play “What if” for a moment. What if the SEC eliminates 12b-1 fees? How will that change the 401k industry?
Alfred: It could dramatically reshape the industry. Everyone knows the highly profitable active investment management industry has subsidized the low margin administration business for years. I’m not an expert on administration but I would assume that many of the existing players would find the business very unprofitable without kickbacks.
FN: Now, let’s talk about what’s more likely to happen. The Wall Street Journal feels the SEC will likely require the conversion of the larger 12b-1 fees into commissions. Do you think this is reasonable? Do you think the SEC should go further? If 12b-1 fees stay, what would you advise 401k plan sponsors to do in order to get a better handle on them and avoid conflicts-of-interest? Recall, the ICI says the use of 12b-1 fees in 401k plans is declining, so does this mean 401k plan sponsors are already taking care of this issue by themselves?
Alfred: Large plan sponsors mostly avoid revenue sharing at this point unless it’s all returned to investors in some form or another. It just takes time for smaller sponsors to catch up.
FN: The SEC recently issued guidelines for target date funds. Can you give me 3 things you like about those guidelines and 3 things you don’t like?
Alfred: Target date funds are a big focus of discussion and research here at BrightScope. We’ve been very vocal about our concerns and will continue to advocate for plan sponsors and investors going forward. Recently, we’ve provided some comments to the DOL on their proposed checklist for plan sponsors. We think they are on the right track. The problem is that once plan sponsors start using this checklist, they will discover that pretty much all of the proprietary target date funds offered by major recordkeepers don’t pass the checklist. So plan sponsors will either need to leave their recordkeeper or force them to offer non-proprietary funds.
The SEC is also on the right track in forcing the funds to more clearly state how they are invested. If I was 63 in 2008 (and two years from retirement) and lost 42% percent in my provider’s 2010 fund, I would have been furious. I would have been even angrier when I discovered that my best friend who is also 63 owned another fund company’s 2010 fund and only lost 15%. Clearly, in many cases, investors’ expectations of the risks they were taking were completely different than the risks they were actually taking.
FN: Now put on your political crystal ball. Many folks much wiser than us expect the November to possibly rock the political landscape. Do you see anything in this election cycle that 401k plan sponsors should pay particularly close attention to?
Alfred: No, not really. I think plan sponsors should be focused on cleaning up the issues already lurking in their plans rather than focusing on Washington. As a starting point, they need to ask themselves if really know their total plan costs, including all implicit trading costs and other “hidden” fees. My experience is that most plan sponsors have no idea and the ones that think they do often have an incomplete or incorrect understanding because their advisors or providers are not disclosing everything to them.
FN: Finally, and we’ll end on something a bit easier for you to predict, does BrightScope have something new up its sleeve before year end and can you give us a quick tease about it?
Alfred: We wouldn’t be BrightScope if we didn’t have several major initiatives planned. The problem is I can’t tell you anything about them right now other than to say that we believe they will make a bigger impact than anything we’ve done to date.
FN: Thanks, Mike. Good luck and we look forward to talking to you again!
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