Last week the House of Representative passed the American Jobs and Closing Tax Loopholes Bill (H.R.4213) aka “Tax Extenders Bill”. The bill is significant because it extends unemployment benefits and small business loan programs that were set to start expiring this week. To prevent lapses, many Congress-watchers expected the Senate to pass this bill before the Memorial Day holiday. But, the bill faced some unexpected hurdles last week. Fiscal conservatives worried about its impact on the deficit. Venture capitalists worried about the new tax treatment of carried interest. Some bargains had to be made and the bill lingered in the House all week, ultimately passing after the Senate’s self-imposed deadline. However, none of the issues raised in the House related to the fee transparency portion of the bill and most believe that this piece of the legislation has enough support in the Senate to remain intact.

If the bill were to pass, this would be yet another big win for George Miller and his staffers, after what has been a nearly 5 year battle to pass fee transparency legislation. But, in Washington, nothing is certain. The bill is likely to be debated in the Senate starting early next week. The extra 10 days to review the bill in detail will elicit some additional lobbying and debate and lead to some additional changes that may need to be reconciled. That said the likelihood of passage has never been higher.

Two weeks ago Morningstar published its 2010 Target Date Fund Survey. In the survey Morningstar compared the performance of “open” and “closed” fund series and drew the conclusion that neither had a distinct performance advantage. This conclusion is not particularly surprising given relatively few funds have long enough return histories to do a complete analysis. However, what was surprising was what Morningstar omitted from the report, and in particular three major differences between “open” and “closed” funds that we think paint a very clear picture of why the differences between open and closed funds are significant. Before we dive into these three major differences, let us first briefly touch on why this issue is important.

Conflicts in Target Date Funds: Open vs. Closed Architecture

One of the largest recurring issues in the target date marketplace is the presence of conflicts in “closed” target date fund management, in which a single manager controls the glide path and manages the underlying investments. Our recent study entitled “Real Facts about Target Date Funds” made the point that closed target date fund series have conflicts of interest, insofar as the manager has an incentive to take on more risk and allocate more heavily to more lucrative, higher-cost investments. There are at least two solutions to this problem. One is requiring all target date fund managers to be fiduciaries. The other is separating glide path creation and fund selection from investment management. There are several fund families that have taken this “open” approach. Comparing the performance differences between open and closed funds is likely going to be a significant battlefield over the next few years, and Morningstar is in a unique position to weigh in on the issue.

So Which One is Better: Open or Closed?

With only a few years worth of performance data, it remains to be seen whether the conflicts in target date funds will lead to concrete performance or design differences between “open” funds and “closed”  funds. Morningstar looked at the data for target date funds and tried to determine whether or not open series had a demonstrable return advantage. They concluded that there is no difference. Or at least not yet. I have some qualms with their methodology of simply sorting all target date funds by returns and counting how many open funds are in the top 10 and bottom 10 in order to determine which version is winning. But, putting that methodology discussion off for another day, when you move away from the “sort and count” approach and actually look at the averages for open and closed funds, three data points literally jump off the page:

1. Closed Target Date Funds have more Aggressive Glide Paths: In theory, the major drawback of closed architecture funds is that the managers have an incentive to ratchet up the risk in their glide paths so that more money is allocated to funds with higher fees. If this hypothesis is actually borne out by the data, then it is actually rather arbitrary to compare performance. The more aggressive closed funds would outperform in bull markets and the more conservative open funds would outperform in bear markets. But does this difference actually exist in the Morningstar data? As it turns out, it not only exists, but is significant: 2010 target date funds with open architecture had an average equity allocation of 36.6%, while 2010 funds with closed architecture had an average equity allocation of 49.1%.

This is a very significant difference in risk between funds of the two types. Target Date managers with closed architecture are taking much larger risks and allocating more money to equities than their open architecture brethren. This strategy did not benefit investors who were counting on that money to retire only to find they lost 40% of their assets in the 2008 downturn. But, this difference is in line with the incentives target date fund managers have to create aggressive glide paths and bloated equity allocations in order to increase investment management revenue. While a single data point is not conclusive as evidence of a conflict, we honestly did not expect the gap to be as large as it is and believe that it warrants additional research.

2. Closed Target Date Funds Use Almost All Active Management in All Asset Classes

The second major way a conflict in target date funds might manifest itself in the data is increased use of higher cost active management funds. We compared the use of active management by closed managers and open managers in the Morningstar data. In total, 12 of the 17 (70%) closed architecture series included in the report invested 100% of its assets in actively-managed funds, compared to only 1 of 7 (14%) open architecture series.  The average active allocation for closed architecture series is roughly 90%. However, if you exclude Vanguard this number jumps to over 96%. In comparison, the average active allocation for open architecture series is 49%.

This data point is even more conclusive than the previous one: closed managers are far more likely to use active management in all asset classes than are open managers. The difference in allocation to actively-managed funds is particularly important when you consider Morningstar’s own conclusion that “Management subtracts from returns” (22).

3. Closed Funds Exhibit Worse Fund Selection Capabilities.

In their performance attribution analysis, Morningstar determined that fund selection was a detractor for 23 of the 32 series. So, in general it doesn’t appear that target date fund managers can consistently add value through fund selection. However, the more interesting data point is that the average performance attribution of open funds was -0.64% compared to -1.77% for closed funds – so while both are subtracting value, closed funds are subtracting an additional 1% a year from returns.  Fiduciaries and investors should track this performance gap closely. Losing 1% in performance over a 30-40 year period can have a major impact on retirement outcomes. I think researching why this gap exists is a critical next step, and in particular identifying if the gap is related to 1-2 above.

Conclusion

The three bullet points above show stark differences between open and closed target date fund management. Due to these differences, there will be meaningful performance differences in the future. Fiduciaries need to be doing more to analyze their target date funds and in light of this data should consider whether the fund is open or closed. This is particularly relevant right now because the overwhelming majority of target date fund assets are currently in closed funds:

Disclosure: We have ongoing dialogue with John Rekenthaler, Morningstar’s VP of research. Their team is very good with data and John made it clear that they will take another look to see if anything jumps out at them. I am confident that when they do take another look they will be just as interested in the data as we are. I look forward to reading the conclusions they make, if any.

Fielding Miller is the Co-Founder and CEO of CAPTRUST Financial Advisors, a widely-regarded firm on the leading edge of the emerging retirement advisory industry. Headquartered in Raleigh, NC, CAPTRUST employs 140 professionals and operates from twelve offices around the country.

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BrightScope: Can you tell us a little bit about CAPTRUST?  What percentage of your business is retirement plan business? How has your firm grown and changed in recent years?

Fielding Miller: CAPTRUST actually began in 1989 as a two-man practice with one retirement advisory account.  From the beginning our primary focus has been qualified retirement plans but our business evolved to include foundations, endowments, private investors and non-qualified plans.  We feel very blessed to have chosen the path we did, but in the beginning the opportunity was not so obvious.  However, we invested aggressively, kept building and now serve over 500 retirement clients with $30 billion in assets and over 500,000 plan participants.

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BrightScope: At the recent PLANADVISER National Conference you said that the current market is “a huge bull market for some retirement advisors.” Can you explain what you meant by that?

Fielding Miller: Sure, we are very excited about the prospects for our industry and our firm.  So many factors are coming together to produce a unique and interesting opportunity.  At the highest level, this is a bull market for advice.  Plan sponsors are facing more problems – and more complex problems – than ever before.  The vagaries of the recent market and the aging of our population are shining a huge spotlight on the value, and security, of retirement funds.  Plan sponsors are facing all sorts of regulatory and legislative changes in response to these pressures.  Their world is changing quickly, and they need strong, clear guidance.  That being said, I do not think this bull market for advice will propel all firms equally.

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BrightScope: Can you explain how you think firms may be impacted differently?

Fielding Miller: Plan sponsors are focusing more than ever on the relative quality of advisors.  We are seeing increased use of RFP’s in the advisor selection process.  We are seeing much greater emphasis on fee disclosure.  And, we are seeing far greater emphasis on an advisor’s ability to provide holistic guidance on the complete retirement package.  Advisors who have relied on personal persuasiveness or hidden commissions will be exposed – and may find themselves struggling under the scrutiny.  I believe firms who can respond successfully to the three issues mentioned earlier will experience massive demand.  These will be the firms which experience a “huge” bull market.  These advisors will benefit from both the market tide and from their ability to provide the independent, cost-effective, and comprehensive advice plan sponsors are seeking.

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BrightScope: Some industry experts are expecting major consolidation in the retirement plan marketplace.  Are you seeing this trend?

Fielding Miller:  Regarding consolidation in the plan provider market, I can only see the trend accelerating.  The providers are in a classic game of scale which will force many of the smaller players to find a dance partner.  As for the advisor consolidation, I do not believe that we have begun to see meaningful trends.  The industry has been expecting advisor consolidation for quite some time.  Many people, including us, thought it would come at a faster pace than it actually has.

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BrightScope: If you don’t see a great consolidation trend among advisors, what other trends do you see in the advisor space?

Fielding Miller:  We are beginning to see a trend of increased delineation among the firms based on some of the factors mentioned in the last question.  Over time, I believe the successful retirement advisors in our industry will become aligned into three segments:

• The small plan market (under $20 million) will be dominated by advisors with the wire houses and insurance brokerages which specialize in retirement and are supported by a home-office support structure.  These advisors will be less interested in sharing the fiduciary role and will emphasize a transactional approach which provides an efficient but “set menu” of retirement solutions.
• The mid-size plan market (under $1 billion) will be dominated by specialist advisors primarily with the independent firms who embrace the fiduciary role and have reached the level of scale and resources to create more specialized solutions for their plan sponsors and participants.
• The large plan market (>$1 billion) will continue to be dominated by the major consulting firms which provide retirement services mostly within a suite of other human resource consulting solutions.  In most cases, the revenue generated by pure retirement advisory services does not move the needle in these large consulting firms.  Thus, they typically approach retirement advisory as an additive service versus a primary focus.

The mission and goal of CAPTRUST is to serve the middle market.   That is our intention and the framework for our growth strategy.

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BrightScope: If you aspire to be a dominant player in the second group – what is your growth strategy?

Fielding Miller: The secret to our success, today and in the future, is our ability to attract the best talent.  We truly believe that we are in the right industry, at the right time with the right model – and to accelerate our growth and success, we need more high quality advisors, analysts and client service personnel.  In recent years our primary growth has come through organic increases in our client base – although we have completed acquisitions when we have had opportunities to attract great talent in desirable markets.  I expect we will continue to grow in this manner.

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BrightScope: What are your thoughts about the continued focus on investment advice by Congress and the DOL?

Fielding Miller:  Most current advice proposals seem to address either the availability of conflict-free advice or the safety and appropriateness of retirement asset allocations.  Congress and the DOL want American workers to have advice free of conflict that directs them to safe and appropriate asset allocations.  In theory that is a great goal.  Legislating, or regulating, that outcome has obviously become extremely challenging.  “Conflict-free” is probably easier to define, and we expect to see that part of the equation nailed down first.  The recently re-issued DOL ruling on this issue made good progress, although it is hard to imagine the logistics involved in a government agency certifying the impartiality of a computer model.

We have the most concern with attempts to mandate, legislate, or regulate the asset allocation.  Mandated index funds or target date funds are not the answer.  These funds have advice embedded in their design, and as such, they have a place in the line-up of options.  But mandating either of these options presupposes preferences about the glide path which may not hold up for all participants within a given company or industry.

Finally, we feel that Congress and the DOL may be speaking to the means when the most powerful focus could be on the end.  Few of the advice proposals speak to the need for plan participants to understand whether they are tracking appropriately toward the final income needed to sustain them in retirement.

Obviously the solutions are not easy.  Participants need to understand more clearly the compounded impact of their retirement savings decisions over time.  There is currently much evidence of inertia and confusion.

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BrightScope: Are your clients concerned about the recent rise in ERISA litigation, specifically as it relates to fees in defined contribution plans?

Fielding Miller: Clients are certainly concerned about trends in litigation, and fees are no exception.  We have always advocated fee transparency, so our clients have an above average understanding of their fees – both the components and the costs relative to other market options.  The law does not state that plan sponsors have to provide for the lowest fees – just that the fees associated with their plans be fair and reasonable.  To meet the fiduciary standard in this area, we encourage our clients to have the right processes in place for fee examination, to document their analysis, and to keep up with their disciplined investigation.

And, while we certainly encourage close examination of fees as a deterrent to possible litigation, we also make sure our clients understand that their fiduciary liability extends beyond fees.  Our clients understand that at the end of the day, the investment process can have a far greater impact on retirement outcomes than fees.  The difference of a few basis points in fees pales in comparison to poor oversight on the investment side.  Both are critical parts of the fiduciary standard and must be balanced accordingly.

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BrightScope: What has your firm done to help plan sponsors address fee disclosure issues? Have you adopted or created any fee benchmarking tools?

Fielding Miller: Fee benchmarking is critically important.  We believe that it is a central component of our value proposition to have regular discussions with each of our clients pertaining to their plan fees – the components, the actual charges and who is bearing the end cost associated with each fee.  We benchmark fees for each new plan, review the information with their committees and document the entire process.  On an ongoing basis, we benchmark fees approximately every three years unless the client has undergone a major event, such as a merger, which could impact the participants, assets or services needed by the plan.

CAPTRUST is very close to having the internal resources and critical mass of data from our client plans to create our own tool. We are about a year away.  In the meantime, we are combining our data with an industry tool.  A firm of smaller scale would obviously need to partner exclusively with an outsourced service.

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BrightScope: If you put yourselves in the shoes of a plan sponsor fiduciary, what do you think are the most important things to consider when selecting an advisor or consultant?

Fielding Miller:  A plan sponsor should start with the givens and make sure the advisor is independent and objective.  Conflict-free advice from a fee-based advisor should be a baseline requirement.  Close on the heels of these two factors, a plan sponsor should get comfortable that the advisor has the necessary intellectual resources, technology, and disciplined processes to satisfy the investment objectives and fiduciary responsibilities.  We consider these the “entry tickets” – the basics that gain us admittance into the discussion.  After these considerations, I believe plan sponsors should ask three questions.

Does the advisor have direct experience with the specific issues we are facing?  A plan sponsor should probe for proof where positive outcomes were achieved in similar circumstances.  Next, a plan sponsor should try to determine how important the client relationship will actually be to the advisor.  Will this feel like a true partnership?  Will the advisor be proactive – in both practice and mindset?  And finally, a plan sponsor should consider whether there is a good match in personality and temperament.  This may sound trite, but an advisor should feel like a trusted member of the team.  A plan sponsor needs to work with someone who thinks and responds in a similar manner.  Our work is a business, but it is also a relationship.

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Interview disclaimer: Fielding Miller’s opinions are his own and do not necessarily reflect the opinions of BrightScope Inc.

Steve Utkus is the head of retirement research at Vanguard. Though we have never met personally, we have been fortunate enough to appear alongside Steve in articles, including this article about BrightScope that appeared in BusinessWeek. His comments in the press are generally wise and insightful which makes sense given his 25+ years of industry experience.

On Monday of this week Mr. Utkus wrote about BrightScope on his Vanguard blog. In his post Mr. Utkus was warm to the idea of ranking the quality of 401k plans, and due to the fact he discussed BrightScope exclusively, it is clear that he views BrightScope as the market leader in this new space. However, he did point out one problem he has with the BrightScope Rating system:

All of this seems like a useful exercise until you dig a bit further. BrightScope’s ranking system reveals one problem. The top of the scale is dominated by plans for doctors, money managers, and pilots; the bottom, by plans for retail workers. So at least from this perspective, it seems like the rating is less about your 401(k), and more about your income—whether you’re a pilot, a money manager, or a retail clerk.

The good news is that if this is Mr. Utkus’ only problem with our rating system then we are in a really great spot, as it is just one and it is easily addressed. So how did he decide this was a problem? Well, he bases his entire argument on an assumption he makes that turns out to be factually inaccurate:

Meanwhile, in the marketplace, a few start-up companies are looking to profit from the trend. One is BrightScope, which provides a rating of many 401(k) plans in the U.S. If your employer plan is rated 90 or above, it’s stellar in their estimation. If it’s rated 50 or less, it’s not.

As the head of retirement research at one of the largest and most respected providers in the 401k space, I would have expected Mr. Utkus to do a little bit more research before reaching this erroneous conclusion. BrightScope has never said that “90 or above is stellar” and “50 or less” is not. What really matters in our rating system is the relative rating to a relevant peer group. Every single BrightScope Rating chart has the BrightScope Rating on the top of the chart and the lowest, average and highest rated peers in the peer group on the bottom of the chart (see below):

Peer plans are selected based on their industry (as a proxy for demographics) and on their size in assets and participants. By comparing to peer groups we have provided the context with which to determine whether a plan is performing well, which is why there are plans that score a 50 that are above average in their peer groups and plans that are 65 that are below average in their peer groups.

Secondly, focusing only on the overall BrightScope Rating is to ignore the second part of our rating system, which are the plan component ratings.  While a plan might have a higher score due to high funding  – salary deferrals and company contributions – it still might get a bad rating on fees, investment menu quality or participation rate (see example below):

If the plan sponsor (above) has a high BrightScope Rating due in part to high salary deferrals and company contributions, certainly our component ratings make it clear that there still is room for improvement. While the BrightScope Rating looks at things holistically, having a high rating might mean that great demographics are disguising other problems with the plan, which is why the component ratings are so valuable. In fact, for most of the plan sponsors and advisors who work with us the component ratings are a critical piece of our rating system.

I think fundamentally Mr. Utkus has one question about our rating system: why did we design our rating system to allow for both the relative rating of a plan to a peer group, but also the absolute differences between plans that aren’t in the same peer group? In other words why do we let company demographics impact the BrightScope Rating?

There are both philosophical and practical answers to this question:

The philosophical answer is that BrightScope believes that the primary purpose of a retirement plan is to create retirement income security for the highest proportion of a company’s employees. As a result, we believe the best measure of a plan’s success is determining how well it does at creating retirement income security for its participants. At BrightScope we call this “retirement outcomes” and it pervades everything that we do. When you rate a plan based on how quickly it is getting its participants to retirement you see ratings differences based on demographics factors as well as on things like fees and investments. While it is tempting, it is impossible to cleanly separate retirement outcomes from demographics. In addition, by peer grouping after we calculate the ratings our rating system has the flexibility to allow advisors and plan sponsors to create custom peer groups based on their unique knowledge of their firms and industries. If we had built the peer groups into the rating system we would be dictating how peer groups are constructed and not respecting the complexity of the marketplace and the unique knowledge and experience advisors and sponsors have accumulated. In fact one of the parts of our system that advisors and sponsors like the most is the flexibility and customizability of our peer grouping.

The practical answer is that in order for a data point to be an input to our calculations we must have that data in a uniform way across all plans in our dataset. At present no one has demographic information for every 401k plan in the country, and without consistent information for every single plan it can’t be used as an input to our calculations. The good news is that corporations currently do plenty of benchmarking of their benefits (salaries, bonuses, executive compensation, health plans etc.) even though they lack perfect demographic information on all of their peers. How do they overcome not having perfect demographic information? The answer is simple, they construct peer groups. By using industry and size as a proxy and even defining a custom group of peers they are able to benchmark their other benefits. BrightScope is doing no different than what corporate executives have been doing for years and that is using peer groups to compare and benchmark their benefits. While 401k plans are complex, so are just about every other benefit they are benchmarking.  I would argue that the more complex a benefit is the more important it is for a plan sponsor to engage in benchmarking, because complex products are more likely to have larger pricing and value discrepancies.

The second issue that Mr. Utkus mentioned is that some plan sponsors offer other retirement plans and that looking at the DC plan may not paint the entire picture.  This is a reasonable critique and one that several plan sponsors that offer DB plans have brought up in the past. To address in the short term we have placed a disclaimer on every plan page highlighting that the rating applies to just the DC plan and not the entire benefits package. The good news is that BrightScope is hoping to increase its coverage of other retirement plans in the near future to supplement our existing work in the DC market. We are excited to launch these new ratings and are confident it will help address this lingering concern. Even without any additional coverage however our advisors and plan sponsor clients have gained significant value in the comparisons that are available and with our guidance most take other retirement plans into account when constructing peer groups.

The third issue that Mr. Utkus mentions is his analysis of a single plan’s investment menu and his determination (without any knowledge of our algorithms) that the plan was rated poorly because of poor recent investment performance. Mr. Utkus makes several assumptions that are factually wrong and are directly addressed in the FAQ section of our website. We are not doing individual fund ratings. So when a plan has a low “investment menu quality” rating, it does not mean that each of the individual funds are “low quality,” which is Mr. Utkus’ assumption. Rather, it could be that the menu was missing a small cap fund, or had only 1 small cap fund that was underforming. I think even Mr. Utkus would agree that even if the rest of the funds are great, without adequate small cap exposure a plan participant loses a substantial amount of diversification benefit and ends up with a portfolio with a sub-optimal Sharpe Ratio. In this way we are rating the ability of a participant in the plan to build a high quality diversified portfolio. I must also point out that while 5 years of investment underperformance may not mean a fund is “low quality”, I don’t think it is unreasonable to say that a fair share of advisors who work in the DC space and use an investment policy statement and watch list would have removed that fund from the menu sometime during that 5 year period.  If you are an advisor who uses a lot of active management funds and doesn’t remove funds after 5 years of underperformance I would love to hear from you so that I can be corrected in my assumptions.

Fortunately there is at least one point where Steve and I are in complete agreement:

What it seems we need is not just a ranking system, but an interpreter, or a user guide, providing us with all of the caveats and qualifications for a given ranking.

The BrightScope Rating system and our benchmarking tools are designed to provide not just a rating system, but also the tools necessary to customize the comparisons, understand the differences and complexities and ultimately make a decision about what changes, if any, should be made to address the information that comes to light. Without taking a look at the tools, or really understanding the calculations it would be impossible for Steve to know that the “user guide” he so desires already exists. But, I do think he would be happy to know that we agree completely and that there are many in this industry who are committed to transparency and retirement outcomes who want the same things he does . . . many of those people are advisors and plan sponsors who currently subscribe to our tools.

At the beginning of 2010 the Investment Company Institute (ICI) released an article titled “Dispelling Target Retirement Date Fund Myths with the Facts.” This article appeared on the ICI website and was sent out widely across the industry. The article contained a list of six “myths” about target date funds that the ICI attributed to those calling for  improvements to the target date fund market.  As a counter-argument the ICI put forth a set of 6 “facts”, that purported to refute the set of 6 myths. In so doing, the ICI misrepresented many of the basic facts about target date funds and painted an overly rosy picture of the target date fund marketplace. The white paper that is attached to this blog post is our attempt to set the record straight. We wrote this white paper in consultation with independent fiduciary Matthew Hutcheson and with critical feedback and insights from Joe Nagengast and Craig Israelsen of Target Date Analytics.

Notes: It is important to note that the authors are generally supportive of the growth of target date funds. It is our belief that they hold great promise for the generation of American workers who will be dependent upon defined contributions plans for their retirement income security. But, if these instruments are to be the “number one savings vehicle in America” we think they should be held to a very high standard of quality. Like any new investment instrument they are not without their flaws, but it is up to market participants and the regulators to ensure that the funds, their regulation, and their disclosure are aligned in the best interests of American workers. BrightScope’s general views in the white paper are not shared unanimously by Target Date Analytics and Matthew Hutcheson.

To download a copy of the white paper either click the image above or follow this link: BrightScope Real Facts about Target Date Funds

BrightScope is pleased to announce the launch of the Personal 401k Fee Report, a revolutionary free tool to help all 401k participants better understand the fees they are paying within their 401k plans.

• The tool starts by asking participants for some basic information that we need to show participants the impact of fees on their retirement balance:

• Next the tool asks participants to identify all of their 401k accounts.  According to BrightScope research there are over 15 million 401k accounts for retired or separated employees.  While there is not real data available, BrightScope has estimated that this could represent over $500 billion in retirement assets. Helping participants track down their old 401k accounts and understand their rollover options is of critical importance to securing retirement income for all Americans. Our tool can help participants identify multiple 401k accounts:

• Once a plan is selected you can update your individual investment holdings using sliders.  Because we already have data on 30,000 401k plans entering in investment information should be very straightforward:

• Once a plan has been identified and all funds have been loaded a participant can discover their fees.  In this case the participant is paying 1.22% in their old 401k plan at Anderson Baker Cole and by moving to a low-cost IRA they could potentially save $86,775 in retirement:

• We have also made it easier to roll an old 401k plan into an IRA by simply following the clickable links to a variety of low-cost IRA providers.

Oh and like we mentioned at the top, the personal 401k Fee Report is completely free to use. We just didn’t think it would be fair to charge anyone for a report that helps them figure out what they are paying in fees.

To learn more read the following coverage: Press Release. Washington Post. Investment News. CNN Money. PlanAdviser.

BrightScope recently released new ratings for over 10,000 plans, and updated ratings for thousands of previously-rated plans. In so doing, we hit a major milestone:

We now have over 30,000 plans rated.

Our rating and analytics become more valuable to our clients and partners when there are more plans included in our system. Due to this fact, we are proud to announce that before the end of 2009 we passed 30,000 plans rated (for those keeping score at home this is what we said we would do in July of last year).  This means that over 50% of 401k participants who visit BrightScope.com will find that their plan is already rated.  For plan sponsors and advisors it means that our plan management and benchmarking tools contain superior comparison data to any other benchmarking service.

Growth in Plans with BrightScope Ratings

We Recently Updated Data on Thousands of Plans.

Many plans saw major changes to their ratings as they updated data with us directly.  Many other plans have seen their ratings change as we have updated with fresher data from more recent government filings.  These changes reflect updated filings and updated return histories. As of right now all of our investment analysis is up-to-date as of 9/30/2009.  If you saw a large change in your plan’s rating and would like to learn more please do not hesitate to contact us at Info@BrightScope.com .

We have a Broader Distribution of Plans Rated.

Whether you are a 25 person plan with $500,000 of plan assets or a 100,000 person firm with $5 billion in assets, we have robust comparison data through which you can compare and benchmark your plan’s performance.  Our custom peer group capabilities allow you to see exactly who you are being compared against and ensure that the comparisons are meaningful and accurate.  Below you will see the impact of our expanded coverage of micro, small and mid-sized plans:

Our Fee Benchmarking Remains Unparalleled in the Industry

Our ability to benchmark plan fees is superior to any other benchmarking service.  We break out revenue sharing payments – 12b-1, sub-ta, shareholder servicing – to ensure that you can benchmark your investment and administrative fees independently.  We include hard to quantify fund trading costs – brokerage commissions, spread costs, market impact costs – so that you understand the true costs of fund management.  And because we have over 30,000 plans rated you can truly see how your plan stacks up to others and the easiest ways for you to lower your fees if you so choose.

Below is a graph that shows plan fees on the vertical axis and net plan assets (logarithmic) on the horizontal axis.  When you look at this graph below, two questions should come to mind:  Where am I on this chart?  Should I be making any changes to ensure my fees are reasonable?

Substantial Improvements to our Investment Menu Quality Component Rating.

We continue to refine our investment menu analytics and research. We are proud to announce that our recent initiative to improve asset coverage through new data agreements with collective trust fund and separate account providers has been a resounding success. We have also integrated new investment return data into our algorithms and new analytics into our tools that will continue to make the Investment Menu benchmarking portion of our analytics more useful for advisors and plan sponsors. We will be releasing a research report in the first quarter that will highlight the findings of our Investment Menu research. If you are an investment manager who wants to ensure your funds are accurately displayed in our system do not hesitate to contact us directly, Data@BrightScope.com .

Learn More

Are you an Advisor interested in Advisor Central?  Contact us at AdvisorCentral@BrightScope.com .

Are you a Plan Sponsor looking to benchmark your plan?  Contact us at Dashboard@BrightScope.com .

Today BrightScope is pleased to announce the Top 30 401k Plans of 2009.  BrightScope’s Top 30 list comprises large 401k plans with high overall quality, as measured by the BrightScope Rating. The BrightScope Rating measures how effective a 401k plan is at getting its participants to retirement. More details about the BrightScope Rating can be obtained in the FAQ section of the BrightScope website.

How does a 401k Plan End up on the Top 30 401k Plans List?  Here are some traits of plans making the list this year:

1. Generous Company Contributions: Company contributions consist of matching, profit sharing, stock bonus and all other company contributions in a given plan year. If participants leave the plan before fully vesting company contributions, the company contributions they forfeit are netted out of the total company contributions. We believe this yields a better analysis of company contributions. To be at the top of the list companies must have a high level of company contributions per participant, which is indicative of generous matching and profit-sharing contributions and quick vesting.  The top plan on the Top 30 list, the Saudi Arabian Oil Company, matches 100% up to 9% of employee contributions. The second rated plan on the Top 30 list, the United Airlines Pilot Directed Account Plan, puts in 9% on a non-discretionary basis plus an additional 6%. Other companies on the list exhibit similarly generous plan design and as a result show high company contributions net of forfeitures per participant.  The plans with the highest company contributions are United Airlines ($37,069 per participant), Wellington Management ($18,679 per participant) and Nucor Corporation ($15,598 per participant).

2. Immediate Plan Eligibility:  Plan eligibility is the length of time between when an employee is hired and when they are eligible to participate in the plan. The shorter the time period the better. Twenty-three (23) of the thirty (30) plans on the list offer immediate eligibility to the plan. The longest eligibility period was 6 months, for Nucor and Fedex.

3. Immediate Match Eligibility: Two of the plans on the list make employees wait an additional period of time to be eligible for employer matching contributions, PACCAR (11 months) and Fedex (6 months). For the rest of the plans employees are immediately eligible for matching contributions when they become eligible for the plan.

4. Immediate Vesting:  Fourteen (14) of the top fifteen (15)  plans and twenty-five (25) of the thirty (30) plans on the list offer immediate vesting. The longest vesting schedule of a plan that made the list was UBS, which had a 5 year cliff vesting schedule for employer contributions.

5. Low Fees: 401k plans are not free, but a good plan will make sure that investment and administrative fees are reasonable. Fortunately, plans on the Top 30 List have some of the lowest total fees in the 401k marketplace. BrightScope’s Total Plan Cost (TPC) calculations include investment expense ratios, administrative costs and also fund-level trading and transaction costs. To read more about how we calculate these costs and why we include them, please read this blog post. Two of the plans have all-in fees (including fund-level trading costs) under 0.30%  – IBM and ExxonMobil — and fifteen (15) plans on the list are under 0.50%.  The average total cost of plans on the list is 0.57%.  There are only 3 plans on the list with total fees above 1%.

6. High Participation Rates: As we say at BrightScope, as good as the plan design might be, if people aren’t participating in the plan they aren’t going to reach retirement. The average participation rate among plans on the Top 30 List is 94%, with ExxonMobil obtaining 100% participation. If we are going to solve the retirement security crisis, the first step is higher participation; if your plan has low participation it is time to think about automatic enrollment.

7. High Salary Deferrals: High participation is great, but salary deferrals ultimately drive participant outcomes.  The more people save in their 401k plan, the more they receive in company match, and the more their 401k savings compound over time. It is no secret that plan funding is the number one determinant of retirement success. It should come as no surprise then that over half of the plans on the list have salary deferrals above $10,000 per participant, with an average salary deferral of $10,900 for plans on the list. At the top of the list for salary deferrals is Saudi Arabian Oil Company ($48,240 per participant), FedEx ($15,377 per participant) and Southwest Airlines ($14,283 per participant).

The BrightScope 2009 Top 30 401k Plans List:

Rank	Company/Plan	BrightScope Rating	Location
1	The Savings Plan of Saudi Arabian Oil Company	92.89	Houston, TX
2	United Airlines Pilot Directed Account Plan	90.59	Chicago, IL
3	Wellington Retirement and Pension Plan	88.66	Boston, MA
4	Southwest Airlines Pilots Retirement Savings Plan	86.68	Dallas, TX
5	SchwabPlan Retirement Savings and Investment Plan	86.15	San Francisco, CA
6	ConocoPhillips Savings Plan	86.13	Bartlesville, OK
7	Chevron Employee Savings Investment Plan	86.04	San Ramon, CA
8	ExxonMobil Savings Plan	85.84	Houston, TX
9	Employees Savings and Retirement Plan of Credit Suisse Securities (USA), LLC	85.83	New York, NY
10	Amgen Retirement and Savings Plan	85.69	Thousand Oaks, CA
11	Nucor Corporation Profit Sharing and Retirement Savings Plan	85.61	Charlotte, NC
12	BP Employee Savings Plan	85.43	Houston, TX
13	Pharmacia Savings Plan	85.01	Peakpack, NJ
14	PACCAR Inc Savings Plan	84.77	Bellevue, WA
15	The Cargill Partnership Plan	83.58	Minneapolis, MN
16	Textron Savings Plan	83.57	Providence, RD
17	Valero Energy Corporation Thrift Plan	83.53	San Antonio, TX
18	Freescale 401k Retirement Savings Plan	82.68	Austin, TX
19	The 401k Savings and PSP of the McGraw-Hill Inc. and its Subsidiaries	82.56	New York, NY
20	Bayer Corporation Savings and Retirement Plan	82.52	Pittsburgh, PA
21	UBS Savings and Investment Plan	82.49	Stamford, CT
22	Schering-Plough Employees Savings Plan	82.42	Kenilworth, NJ
23	GlaxoSmithKline Retirement Savings Plan	82.21	Philadelphia, PA
24	Motorola, Inc. 401k Plan	82.16	Schaumburg, IL
25	Avaya Inc. Savings Plan for Salaried Employees	82.13	Basking Ridge, NJ
26	Nortel Networks Long-Term Investment Plan	81.57	Nashville, TN
27	Federal Express Corporation Pilots Retirement Savings Plan	81.34	Memphis, TN
28	IBM Savings Plan	81.29	Armonk, NY
29	Lockheed Martin Corporation Salaried Savings Plan	81.26	Bethesda, MD
30	General Dynamics Corporation Savings and Stock Investment Plan (Plan 4.5)	81.05	Falls Church, VA

To learn more about the Top 30 Plans List please contact us at info@brightscope.com. This award is based on plan experience through 12/31/ 2007.

*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.

**UPDATE: Ratings continually change as data is updated over time.  Ratings should be viewed as a “snapshot in time.”  To view current ratings information for a given plan click to view the companies plan page.

Fred Reish is a shareholder of the law firm of Reish & Reicher. He specializes in employee benefits law. He is a member of the bar in the State of California, the State of Arizona and the District of Columbia. Fred serves as a consultant on ERISA litigation and FINRA arbitration, with a focus on cases involving broker-dealers, registered investment advisers, financial service companies and other service providers. Fred has also been engaged to serve as an expert witness in state courts, federal courts and FINRA arbitration proceedings involving issues as diverse as fiduciary liability, fiduciary status of advisers, prohibited transactions, plan interpretation, nonqualified deferred compensation plans, and bankruptcy issues for ERISA plans. Fred was recognized by 401kWire as the 401(k) Industry’s Most Influential Person for 2007. Fred received a B.S. from Arizona State University and a J.D. from the University of Arizona.

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BrightScope:  Can you tell us more about your firm and recent changes (new name etc)?

Fred Reish: We have been debating the future direction of the firm for several years. Should we be a full-service firm? An ERISA- and Employment Law focused-firm? And so on. Earlier this year, we reached a decision on those issues . . . actually, we reached two decisions. The first is that, from an industry perspective we want to concentrate on representing companies that provide investments and services to retirement plans. That includes bundled providers, independent recordkeepers, third party administrators, insurance companies, and mutual fund complexes. And, it specifically includes RIA firms and broker-dealers. For those clients, we have set up a financial services group within the firm to combine consulting and litigation attorneys in a way that solves the clients’ needs for attorneys who know both the securities laws and ERISA. The second decision was that, from a plan sponsor perspective, we want to focus on helping employers meet their needs for both compliance services and risk management advice. Furthermore, we want to do that within the HR context of employee relations. So, we have combined ERISA attorneys and Employment Law attorneys into a single practice group. They will focus primarily on mid-market employers–to service the needs of large, mid-sized and small companies. The name change reflects both the structural changes and changes in the attorneys in the firm.

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BrightScope:Many have said that the next major wave of fee litigation will be against service providers.  Do you agree with this assessment?

Fred Reish:It seems almost certain that the next wave of litigation will be on issues related to costs, revenue sharing and investments, and that these cases will include claims against service providers. In addition, there will be an increasing number of lawsuits filed against mid-sized and smaller companies and their advisers and providers. Also, as stated earlier, I think the claims will focus on costs, revenue sharing, and investments for a simple reason . . . because that’s where the money is. And, these are also areas where many, and perhaps most, plan sponsors lack the detailed knowledge to properly understand, investigate and benchmark the issues.

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BrightScope: We have also heard that there might be more litigation against small plans.  Is that likely?

Fred Reish: Yes, as the law develops through litigation and court decisions, the plaintiffs’ attorneys become more experienced and the law becomes clearer. Those changes enable the attorneys for participants to more easily sue plan fiduciaries for losses and also enable the attorneys for plan sponsors to sue advisers and providers. The combined effect of these changes is that, as the ease and cost of litigation improves from a plaintiff’s perspective, there will be an increase in litigation against mid-sized and smaller plans.

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BrightScope: Moving to a discussion of providers. Do you believe that providers are ready for the new 2009 Schedule C regulations and disclosure of indirect compensation?

Fred Reish: Some are and some aren’t. Large plan providers have been working on it for a year or more and should be in relatively good shape. I know that because I have worked with three major providers to help get them into compliance. But I don’t know how the independent recordkeepers are doing. Some may be behind the curb. I am also concerned about service providers who receive indirect compensation, for example, broker-dealers. My sense is that many broker-dealers are not prepared to report the compensation of their advisers to their Schedule C plan sponsors. That is a significant issue.

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BrightScope: What feedback have you received from providers about the content of HR2989?

Fred Reish: HR 2989, the so-called Miller bill, covers three areas that will impact 401(k) plans and their providers. The conflicted investment advice provisions of that bill are highly controversial and would negatively impact almost everyone other than independent RIAs. The other two provisions–disclosures to plan sponsors and disclosures to participants–are not particularly controversial, although there is not universal agreement on some of the details. The lack of major controversial issues is partially due to the fact that the DOL has been working on similar regulations for over a year. In fact, we are more likely to get regulations within the next six months than we are to get legislation. Either way, there will be significant increases in disclosures to plan sponsors and participants. In my opinion, those changes will be disruptive in the short term (e.g., for the next two to three years) but will be beneficial in the long term.

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BrightScope: What is your take on the new administration’s proposals to harmonize the regulation of broker-dealers and registered investment advisers?

Fred Reish: In this context, the word “harmonize” is being used to mean that the standard of care for broker-dealers and RIAs will be the same where personalized advice is being given to retail investors. As a result, there are at least three interpretations. Those are: the new standard will be similar to the fiduciary standard for RIAs; or it will be similar to the suitability standard for broker-dealers; or it will be something in between. If the change means that the fiduciary standard will be watered down for RIAs, then I don’t support it. Also, it makes sense for both broker-dealers and RIAs to have the same standard where they provide substantially the same services. Having said that, I think that, whatever the changes are, they will improve the marketplace, particularly with regard to conflicts of interest and putting the clients’ interests first.

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BrightScope: What advice would you give to a plan sponsor in the face of the changing regulatory climate?

Fred Reish: Three recommendations: Work with an adviser who focuses on 401(k) plans; get fiduciary training from a specialized lawyer or consultant who regularly provides that service; and monitor and benchmark the plan investments, services and costs at least once a year. The law does not require that employers be experts about retirement plans, investments, revenue sharing, and so on. However, if they lack the knowledge, it does require that employers work with experts. Remember, that we are talking about people’s retirement benefits, not just 401(k) services and investments. This is an important policy issue for our country and, as a result, the performance of plan sponsors will be scrutinized.

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Interview Disclaimer: Fred Reish’s opinions are his own and do not necessarily reflect the thoughts or opinions of BrightScope. Inc.

BrightScope is pleased to announce our partnership with Target Date Analytics and the launch of the BrightScope On Target Index^TM.  We encourage you to read today’s Press Release and related coverage:

• Press Release

• Investment News – BrightScope Launches Target Date Benchmarking Tool

• Associated Press – BrightScope, Target Date Analytics form new index

• Fund Action – BrightScope, Target Date Analytics, To Unveil Target-Date Index

BrightScope will be releasing more information about the partnership and its new index and tools over the course of the next few weeks. In the meantime I encourage you to visit www.ontargetindex.com to learn more.