401(k) Industry Moves Toward Benchmarking

By Randy Myers

For years, smart companies have benchmarked their performance against their peers to identify opportunities for improvement in a variety of areas, from how efficiently they manage their inventory to how quickly they collect on their accounts receivable. One area they have often overlooked, especially if they were not a very large employer, was their 401(k) plan.

That’s starting to change, says Ryan Alfred, who in 2007 cofounded, with his brother Mike, the 401(k) benchmarking firm BrightScope.

“In the past, a plan sponsor willing to contract with a consultant to do a benchmarking study would typically be a larger sponsor, with at least $100 million in assets,” Alfred told participants at the SVIA’s 2010 Spring Seminar. “Now we see plans as small as $1 million in assets willing to pay a couple of thousand dollars for a benchmarking study from an independent third party to figure out exactly how they stack up in the marketplace.”

This new appetite for benchmarking is reflected in the rapid growth of BrightScope, which already employs about 25 people, maintains data on more than 40,000 retirement plans, and hopes to have 75,000 plans in its database by the end of this year.

Former money managers, the Alfreds say they’re driven by a desire to fill a market need critical to the financial well-being of retirees and the success of their retirement savings plans. “We want to add value for decision makers,” Ryan Alfred said, “so they can properly benchmark the expenses and performance of their plans and ultimately make decisions that positively impact participant outcomes.”

Retirement plan advisors are a primary customer group for BrightScope, using its services not only to benchmark plans for their clients but also to identify plans that might be amenable to a sales pitch. Alfred said retirement plans with $1 million to $100 million in assets are serviced by about 10,000 advisors, with about 2,000 of those controlling the bulk of plan assets. Of that group, he said, about one-third have now implemented some form of benchmarking through third-party providers such as BrightScope.

In the past, plan sponsors who did try to benchmark their plans often relied exclusively on data from their plan providers, which was more limited than what a third-party provider like BrightScope can offer. Now, sponsors are looking to do a more thorough analysis.

“Before, they were typically looking at their investment performance, their match structure, and participation rates,” Alfred said. “But they were not looking at the plan holistically and they certainly did not have enough fee benchmarking information. Now they’re benchmarking fees and they’re also starting to want to measure outcomes.” He defined outcomes as the ability of the plan to generate retirement income for plan participants.

Unlike its competitors, BrightScope makes its plan ratings available free to the public. The company assigns a numerical score for each plan that it tracks, basing that score on more than 200 data points in a number of broad categories such as plan costs, the generosity of the company match, and the quality of the investment menu. Plan sponsors and advisors who wish to see more—and benchmark their plan against a customizable universe of other plans—can do so for a fee. BrightScope’s “plan management dashboard” can show them how various aspects of their plan stack up against those of their peers. Inputting data on their own plan is relatively painless; BrightScope’s database can pull data from most major recordkeeping platforms.

Sponsors who score low in BrightScope’s scoring system can use that information to create a better, more competitive retirement plan, but sponsors who score high gain benefits, too, like being able to share that information with their plan participants. “When they do a good job,” Alfred observed, “they want to be appreciated for that.”