in CFO Conversations by |
Aug 19
2010
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According to the Investment Company Institute, Americans held more than $4 trillion in 401(k) plans at the end of 2009. Despite the size of the market, both employees and employers often are hard pressed to say just how well their plan is doing.
Sure, a generous employer match is better than a stingy one (for the employees, at least), while both the company and its employees generally do better with low or no fees, rather than hefty ones. However, it's been difficult to gain a sense of how one plan compares to another when all elements-such as the match, investment choices and fees-are tallied.
The team at BrightScope Inc in San Diego aims to change that, and has spent several years analyzing 200-some variables of about 50,000 401(k) plans in the US. The result, they claim, is a thorough and neutral assessment of each.
The BrightScope analyses are based on information from a range of sources. A primary one is the audit report that all plans with more than 100 participants are required to file with the Department of Labor, along with the Form 5500, or the Annual Returns/Reports of Employee Benefit Plan. The contents of the audit reports can vary, but they typically identify the funds offered by the plan and their fees, the amount of money in each, the level of the employer match and the vesting schedule, Alfred says.
Using this information, BrightScope runs about 10,000 simulations, watching how the average participant's balance grows over time. The goal is to determine the point at which he or she could retire with about 75 percent of pre-retirement income. The lower this number, the higher the rank-according to BrightScope.
The plan at Emerson Electric in St Louis, for instance, earned a 66, putting it in the top 15 percent of the 50,000 plans analyzed. Even so, the plan falls short of others in its peer group, including General Dynamics-which earned an 80, and Daimler Chrysler-at 79.
What's more, the average employee in a top-rated plan-there are some around 90-would be able to retire about 14 years' earlier than the average employee in the Emerson plan, according to the analysis.
Some might argue that not all the data elements BrightScope analyzes are within a company's control. For instance, its rankings include employee participation rates. While employees obviously have a say here, management also can influence this, Alfred argues, through the quality of its communications about the plan and the generosity of its matches.
In addition, the rankings compare companies within industries, so a retailer with more lower-paid and temporary workers won't go up against a software firm whose staff is largely professionals. "Peer groups really help mitigate for those demographic factors," Alfred says.
To be sure, when it comes to these kinds of calculations, it is possible to debate endlessly what data to include and how to account for it. But the BrightScope rankings provide one tool companies-and their employees-can use to evaluate their plans, and get an idea of how they compare to similar firms.
Sure, a generous employer match is better than a stingy one (for the employees, at least), while both the company and its employees generally do better with low or no fees, rather than hefty ones. However, it's been difficult to gain a sense of how one plan compares to another when all elements-such as the match, investment choices and fees-are tallied.
The team at BrightScope Inc in San Diego aims to change that, and has spent several years analyzing 200-some variables of about 50,000 401(k) plans in the US. The result, they claim, is a thorough and neutral assessment of each.
"You want truly independent, third-party data," says Mike Alfred, co-founder and chief executive officer. Too often, plan sponsors receive performance information only from their plan providers.
The BrightScope analyses are based on information from a range of sources. A primary one is the audit report that all plans with more than 100 participants are required to file with the Department of Labor, along with the Form 5500, or the Annual Returns/Reports of Employee Benefit Plan. The contents of the audit reports can vary, but they typically identify the funds offered by the plan and their fees, the amount of money in each, the level of the employer match and the vesting schedule, Alfred says.
Using this information, BrightScope runs about 10,000 simulations, watching how the average participant's balance grows over time. The goal is to determine the point at which he or she could retire with about 75 percent of pre-retirement income. The lower this number, the higher the rank-according to BrightScope.
The plan at Emerson Electric in St Louis, for instance, earned a 66, putting it in the top 15 percent of the 50,000 plans analyzed. Even so, the plan falls short of others in its peer group, including General Dynamics-which earned an 80, and Daimler Chrysler-at 79.
What's more, the average employee in a top-rated plan-there are some around 90-would be able to retire about 14 years' earlier than the average employee in the Emerson plan, according to the analysis.
Some might argue that not all the data elements BrightScope analyzes are within a company's control. For instance, its rankings include employee participation rates. While employees obviously have a say here, management also can influence this, Alfred argues, through the quality of its communications about the plan and the generosity of its matches.
In addition, the rankings compare companies within industries, so a retailer with more lower-paid and temporary workers won't go up against a software firm whose staff is largely professionals. "Peer groups really help mitigate for those demographic factors," Alfred says.
To be sure, when it comes to these kinds of calculations, it is possible to debate endlessly what data to include and how to account for it. But the BrightScope rankings provide one tool companies-and their employees-can use to evaluate their plans, and get an idea of how they compare to similar firms.
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