Tools for Rating Your 401k

With the retirement hopes of tens of millions of Americans riding on 401k plans, it is noteworthy that very little has been done to allow 401k participants to compare and rate these plans. The prevailing sentiment when it comes to 401k's is: 1) be happy that you even have a 401k (50% of workers don't have any employer-sponsored retirement program) and, 2) 401k plan details and priorities will pretty much be up to the sponsor to decide.

The participants whose retirements are at stake are largely in the dark about how good (or bad) a plan they have or how it compares with plans at other comparable employers. For that matter, employers have no simple way of learning how their 401k stacks up against the competition. Independent and objective comparison of 401k plan facts, to this point, has not been a priority.

A new web service called BrightScope aims to change that. Using a complex methodology¹ that "is 100% quantitative" and "truly independent", the BrightScope service gives a company's 401k a numeric score between 0 and 100 and plots the company's score along a colorful chart that also shows lowest, highest and average ratings of 401k plans in that peer group²

The ratings also give component ratings for six key plan features:

• Total Plan Cost
• Company Generosity
• Investment Menu Quality
• Participation Rate
• Salary Deferrals
• Account Balances

With roughly 800,000 401k plans in existence, BrightScope's stated goal ("to ultimately rate every 401k plan in the country") is truly ambitious. Moreover, with BrightScope being dependent on twelve different government and private data sources that have varying degrees of quality, reliability and timeliness, the accuracy of the ratings is sure to be the subject of much debate.

Still, BrightScope's concept is a good one. We suspect that at some point a BrightScope rating could become something of a "badge of honor" with companies touting their 401k rating just like mutual funds showoff their Mornigstar ratings. This would be a huge step forward in the march toward transparency and informed 401k plan participants.

We hope the venture succeeds and we encourage visitors to check out BrightScope. Here are a few improvements we'd like to see as the service develops:

1. more "drill down" capabilities for users to see underlying details of the rankings
2. industry-specific peer group comparisons (the current peer groups are based mostly on plans size and demographic factors)
3. a top 100 or top 1000 list highlighting the very best 401k plans.
4. less emphasis on the "delay in retirement age" metric - although the calculation is explained in the FAQ notes, this seems to be oversimplified and potentially misleading to casual visitors.

Of course, we also encourage you to to visit the 401k Self-Assessment Tool to better understand and evaluate the quality of your 401k plan.

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This post is part of the latest Carnival of Personal Finance at Wide Open Wallet family finance blog. Be sure to check out the other great entries as well.

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Notes:

1. Here's the official description: The BrightScope RatingTM is a quantitative 401k plan rating developed by BrightScope with the help of leading independent fiduciaries, finance professors and 401k experts. The BrightScope rating algorithm takes in 200+ unique data inputs per plan and calculates a single numerical score for every 401k plan in the country. The algorithm runs thousands of simulations for each plan in order to determine how quickly each 401k plan will get the average 401k participant to retirement. BrightScope believes that this rigorous approach is necessary to ensure that every factor that affects retirement outcomes - company contributions, fees, investment menu quality, vesting schedules etc. - is accurately reflected in a company's rating. The BrightScope Rating is designed to assist industry participants in determining the relative quality of a company's 401k plan when compared to a unique peer group of companies with employees of a similar demographic makeup. We believe that industry adoption of the BrightScope Rating will ultimately lead to more cost-effective plans, increased participation rates, higher employee satisfaction, and better outcomes for employees who depend on their 401k plan for retirement. [↩]
2. Here's the word on peer groups: In order to compare 401k plans, BrightScope constructs a unique peer group for every single plan. BrightScope's peer group algorithm takes into account the number of participants in the plan, the level of assets in the plan, the industry of the plan sponsor and the demographic characteristics of that plan's employees. By controlling for these factors BrightScope makes sure that each is compared to other plans with similar economies for fee comparisons and a similar employee demographic for plan performance comparisons. [↩]