Americans increasingly rely on their 401k plans for retirement yet typically understand little about how their plans work or how they compare with offerings at other companies. Is your 401k cheap or expensive? Does it offer good investments or mediocre ones? A generous match or a stingy one?
And most important: Will your 401k, and the way you take advantage of it, get you through retirement without running out of money?
BrightScope, a San Diego startup, wants to help 401k participants and administrators answer those questions. It has created a massive database from corporate filings with the Labor Department, the Securities and Exchange Commission and other sources to rate 401k plans. To mine all that data, it developed a quantitative model that takes into account hundreds of factors -- everything from the plan's investment choices and fees to its structure, including its generosity to employees. BrightScope then runs simulations to ascertain how well each plan serves the average participant.
The final result is a score of 1 to 100 called the BrightScope rating. The company also assigns each plan six component ratings (on fees, average account balance, etc.) that range from "great" to "poor," so participants and plan administrators can see where the 401k's strengths and weaknesses lie.
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This exercise isn't without precedent. Retirement consultants at Callan Associates, Marsh & McLennan's Mercer unit and Watson Wyatt have long done proprietary analyses -- "benchmarking," they call it -- for big 401k plan sponsors. What makes BrightScope unique is that its ratings are publicly available on brightscope.com, and its analysis has been boiled down to a level anyone can understand. The company now rates about 30,000 plans, double the number it had completed in October.
Mike Alfred, BrightScope's chief executive, believes people should be able to see how their 401k's stack up as easily as they are able to access quality rankings on their mutual funds, their cell phones or their cars. With nearly $3 trillion socked away in 401k's, "it's ridiculous that no one has done anything with the data," he says. "The person who gets it right will find the business opportunity. We're just naive enough to think we'll be the ones to do it."
Here's a list of BrightScope's top 25 401k plans:
| Rank | Company | Net 401k assets ($ millions) | Number of participants | BrightScope rating* |
|---|---|---|---|---|
1 | Saudi Arabian Oil | 1,359 | 2,920 | |
2 | 3,137 | 9,872 | ||
3 | Wellington Management | 1,036 | 2,804 | |
4 | 1,574 | 5,965 | ||
5 | 2,365 | 17,401 | ||
6 | 10,393 | 31,016 | ||
7 | 15,362 | 37,856 | ||
8 | 24,195 | 43,724 | ||
9 | Credit Suisse Securities USA | 2,456 | 19,698 | |
10 | 2,067 | 17,441 | ||
11 | Nucor (NUE, news, msgs) (profit-sharing and retirement plan) | 2,333 | 15,579 | |
12 | BP (BP, news, msgs) (employee savings plan for BP North America) | 9,969 | 40,117 | |
13 | 2,603 | 14,939 | ||
14 | 1,875 | 8,334 | ||
15 | Cargill (partnership plan) | 4,438 | 39,532 | |
16 | 2,968 | 38,884 | ||
17 | 1,893 | 10,212 | ||
18 | Freescale Semiconductor | 1,585 | 10,138 | |
19 | 1,931 | 20,992 | ||
20 | 2,647 | 19,788 | ||
21 | 1,480 | 15,835 | ||
22 | 2,274 | 19,880 | ||
23 | 4,744 | 33,292 | ||
24 | 6,005 | 50,793 | ||
25 | Avaya (salaried employees' plan) | 1,464 | 12,097 |
*List compiled Dec. 30, 2009, based on BrightScope rankings of plans with more than $1 billion in assets. Click the scores to view rating information at BrightScope.
- At BusinessWeek: The bottom 25 plans
Retirements in crisis
BrightScope's efforts come at a perfect moment. Even before the market meltdown of 2008, Americans were headed for a retirement crisis, with the average 401k balance hovering around $60,000. Now, legislators and regulators are debating how to reform these plans and whether there should be new rules on fees, which can seriously damage a plan's performance, or on target-date funds, investment vehicles geared to a specific retirement date that are the default offering in many 401k's for participants who do not choose their own investments.If BrightScope ratings gain acceptance, they could change the retirement world as dramatically as Morningstar's fund ratings altered the investing landscape. More information could help people better evaluate two job offers or arm current employees with information that lets them campaign for better plans. The ratings could also provide a huge service to corporate plan sponsors, particularly small ones that can't afford to hire high-paid consultants to evaluate and improve their plans.
It's too early to say that tiny BrightScope, with just 22 employees, little revenue and months of red ink, will usher in all these changes. But the business model -- a mix of free reports and subscription-based products that offer more-detailed analysis -- could prove compelling.
The first big hurdle is getting the rating formula right. If BrightScope's data aren't good enough or its model proves defective, its analysis could be useless, or it could even nudge both participants and corporations to make decisions based on faulty assumptions.
"It's not as simple as a good plan versus a bad one," says Lori Lucas, who heads Callan's practice in 401k's and other defined-contribution plans. "A mutual fund might have 100 moving pieces. But a 401k might have 1,000, making it difficult to come up with a single rating."
Continued: Competition for Brightscope
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