Thursday, October 15, 2009

Shining a Light on Your 401(k)

It Should be Easier
There are numerous obstacles that keep us from building enough wealth in our 401(k) plans. The first is as simple as beginning to invest in your retirement future. This is stressed frequently and with good reason. The earlier you begin investing, the better situated you will be for retirement in the far-off future.

The second hurdle is how much to invest. I suggests that no matter how poorly a plan you have with your employer, setting at least 5% of your pre-tax income (a number that does not have much of an impact on your take-home pay) is better than not investing at all. For first time 401(k) investors, who may need as much of their paycheck as possible, this is a good start.

The third hurdle is the company match. This is used as an incentive to get you to put some money away for your future by offering to match the first couple of percentage points. Some companies do not do right by their employees when they match only with their own company's stock or if they have lowered or withdrawn the match due to the "economic downturn".

And the last hurdle to these beginners is where to put their money. Not all plans are created equal and not all investments in these plans are worthwhile. That doesn't mean you should ignore the opportunity to invest, it simply means that your choices are not as good as they could be. This is particularly troubling if you are an older investor who may have gotten a late start or if you have changed jobs and are now enrolled in a less than adequate plan.

The Role of the Investor
Often, 401(k) users simply sit back and allow these companies to make difficult choices without their input. There is a fiduciary responsibility that is assumed by your employer when they offer you a plan like this to provide not only viable investments but opportunities to grow your money.

Becoming more vocal, even if you are the lone voice in the crowd used to be difficult. Access to necessary information was largely outside your abilities and most of the information was held close to the vest by the employer. Since January 2009, that has changed.

BrightScope, the brain child of two investment managers and a former engineer at HP, allows you to look at your company's plan in a way that was not possible previously. Designed to help human resource departments make good choices about plans, BrightScope seeks to give these folks some sort of benchmark to judge how their plan is run and how their employees access it and use it. BrightScope realized that "because benefits data has been controlled by a small group of companies that are not incentivized or governed by the same fiduciary standards that a plan sponsor must honor" difficulties in determining which is the best plan to offer their employees was not possible.

This concept understands that transparency is not what it should be and even though regulation to improve these plans may be forthcoming, waiting to id not a better choice. BrightScope it should be noted works with these HR departments and those with the fiduciary responsibility to improve those plans now.

How does it Work?
The software it employs, according to the website, works like this:
"BrightScope obtains some of its data from public sources such as the Department of Labor, the Securities and Exchange Commission, the U.S. Census Bureau, the Equal Employment Opportunity Commission, and the Bureau of Labor Statistics. Mutual fund asset allocation and fee data are obtained from mutual fund prospectuses, statements of additional information (SAI) and Form N-SAR. Mutual fund return history data is obtained from Xignite, Inc. Data on 401k fees comes from company filings, and directly from plan sponsors who work with us to improve their plan. While all participant-level data is protected and confidential, we aggregate data across comparable companies to construct relevant benchmarks for fees, plan design and plan performance. BrightScope believes it possesses the most comprehensive database of 401k information in the country. The company leverages this database to provide plan sponsors, advisers and participants with accurate and high quality data to help them make more informed decisions."

It also realizes that the cost passed on to you in the form of fees is not readily available to you and therefore must be garnered from the overall return of the investment. This is also up for regulatory change.

The company also makes some assumptions when it applies its magic to your plan. It grabs an average employee, someone who is a "44-year-old, gender-neutral individual, earning an income of $44,000 a year, with a starting account balance of $40,000". From there, it acknowledges that each plan offers different company contributions, its own set of fees (generated by the large variety of plan sponsors, banks, mutual fund families , insurance companies, etc.), what is offered in the plan and whether the investment menu quality is adequate enough to provide growth opportunities, and how soon the employee may begin to use the plan (vesting schedules). These are, to say the least, unique to each company.

After determining what the company calls the "retirement goal line", a calculation that uses actuarial tables and assumptions of how long it will take the employee to get to retirement, BrightScope then runs a simulation, thousands of them. The better the plan, the quicker the plan participant gets to retirement, the higher the rating the plan gets on a scale of 1-100.

A Step in the Right Direction
It is no easy job being a plan fiduciary. BrightScope offers some much needed assistance with the task. Understanding that the responsibilities are many, including the need to act solely in the interest of plan participants and their beneficiaries, focusing their efforts towards the "exclusive purpose of providing benefits to them" is not as easy as it sounds. Not all companies have the personnel to achieve this sort of understanding.

Many times, the task of due prudence when overseeing these plans. the ability to follow all of the documents associated with the plan, being able to determine whether the underlying investments in the plan are diversified enough and cost effective (remember the fees are net of returns), is not always within the purview of the department responsible.

While you do have the right to request all of this information yourself and you can challenge the plan as being inadequate for your needs, BrightScope makes it easier to illustrate the problem. many companies believe they have done right for their employees. They may not know otherwise.

Check out your plan here.

Paul Petillo is the Managing Editor of and a concerned Boomer.

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