A new benchmarking tool has recently become available to allow retirement plan participants, as well as retirement plan sponsors, to see how their plan is benchmarked or compared against plans of their peers.
Brightscope.com reviews the data that is on file with the government about the plan and then rates six different components of the plan including; plan cost, company generosity, investment menu quality, participation rate, salary deferrals and account balances. Using a proprietary algorithm the company then rates how well the plan is likely to produce meaningful retirement income.
This is unbiased information and compares one plan against many. When some plan sponsors are shown that they have the highest fees or have poor fund selection they tend to make comments such as, “we are really happy with our retirement plan” or “our retirement plan is just fine as it is” rather then saying “Wow we need to look at that.”
Take for example a large well known agricultural seed company. Bright scope indicated it has below average investment quality. The report can be viewed at:
Included in their fund lineup (based on the information on file with Brightscope) were Target Date Funds offered by Putnam. MorningStar, which is the leader in objective investment advise, rates these funds in the bottom 15% of all funds of this type. The investment ratings service tool from FI 360 puts these funds in the bottom 25% for their category. A company that rates target date funds rates the Putnam funds as “F” for performance and “F” for risk with the fees as a “D.”
To top it off, the funds that are offered are “A” class shares and have commissions of over 5% deducted from new purchases. It is beyond me how any company after seeing the facts would then state “(the company) maintains a rigorous due diligence process that covers both 404c and 404a requirements. We are very proud of our program and on going efforts to maintain a high quality retirement plan for our employees.”
While the company is very generous with their matching and the employees are contributing above average amounts, the future retirement income will be less than what it could have been based on a poor choice of investment options provided by this and other employers.
With the uncertainty around Social Security, the low interest environment and the volatility in the stock market, everyone who participates in a 401(k) should check out how their plan is rated and stress to the plan sponsor to make whatever changes are needed to improve the plans ability to produce meaningful retirement income.