The 411 on 401(k)s

Advisors are turning to muckraking firms to get previously undisclosed data on retirement plans.

Retirement planning is no simple task - but it just got a little easier. A growing number of specialized firms have started digging deep into retirement plan documents to unearth competitive details about how the plans work. This new due diligence is developing ahead of Labor Department regulations, which are scheduled to take effect early next year, that will require more detailed disclosures of underlying plan expenses.

In February, the Labor Department will begin requiring retirement plan providers and third-party administrators to reveal investment expenses and service provider fees to plan sponsors. Employers, as the plan fiduciaries, will be required to disclose what participants' share of the plan costs are. The idea is to give firms and investors the data they need to make informed decisions about their retirement savings.

"This is probably one of the most transformational events I've witnessed since the elimination of front-end loads" from many mutual funds, says Ryan Peterson, president of Wisdom & Wealth Solutions, a registered advisory firm based in Raleigh, N.C. The new disclosures certainly could have far-reaching effects. There are 498,000 retirement plans with 401(k) features in the U.S., with 43.1 million active participants holding $2.8 trillion in assets, according to research from Cerulli Associates.

One firm specializing in retirement plan scrutiny is BrightScope, a San Diego-based startup that rates the quality of 401(k) plans at public and private U.S. companies. BrightScope's co-founders recognized that Americans needed better information about their 401(k) plans because the plans had become their primary means of saving for retirement, says Mike Alfred, the firm's co-founder and CEO.

"You could not go online and look up how good a plan was. You couldn't figure out if the match was good," he says. "We thought that was a problem that needed to be fixed."

That widespread opacity could affect American's ability to retire comfortably. It could also obstruct plan sponsors' judgment, because they do not always understand the fees behind their plans, Alfred says.

BrightScope takes a lot of its inspiration from Morningstar, which is credited with helping purge loaded mutual funds from the industry, simply by publishing their associated costs.

Along with co-founder Ryan Alfred, he developed a process of sifting through third-party audited retirement plan tax filings at firms with more than 100 employees. BrightScope investigated about 50,000 plans, chosen based on initial criteria for company headcount and independent auditing.

BrightScope measures each plan's costs, company generosity, quality of investment options, employee participation rate, salary deferrals and account balances, and factors them into an overall rating on a scale of zero to 100. Every report displays the plan's all-in ranking and compares it with that of six other companies in its peer group. BrightScope puts its reporting front and center - posting some of it on its website for free.

"When we talk to plan sponsors, I don't think they understand the liability they face," says Peterson, a BrightScope subscriber. "When the detailed 401(k) statements come out and participants see the fees, there is a lot of potential for lawsuits to occur."

Ameriprise Financial learned that in early October, when several former employees sued. They accused the firm of steering participants toward investments that were too expensive, costing them $20 million in excessive fees.

"This is a copycat lawsuit by a law firm that has brought similar cases against companies across the country, and we plan to defend it vigorously," Ameriprise said in an emailed statement.

Peer Pressures
In mid-July, a Denver-based 401(k) plan service provider, Lincoln Trust Co., introduced the personalized expense ratio, a customized 401(k) plan cost calculation. Lincoln Trust calculates the ratio on an average daily basis, and then compares costs with average costs of similarly sized plans. To get that benchmark, Lincoln Trust relies on data from the 401(k) Averages Book, which offers independent comparisons of 401(k) fees. It also relies on the most recent findings from the Deloitte and the Investment Company Institute's Defined Contribution/401(k) Fee Study.

A plan with an ending balance of $82,581.20 and $238.16 in quarterly plan fees would end up with a personalized expense ratio of 1.20%. That example falls below the $298.54, or 1.50% cost, for a similarly sized plan, according to the 401(k) Averages Book.

The Labor Department's new rules don't go this far, as they will only require plan sponsors to disclose the expense ratio of the fund, per $1,000 balance in the participant's quarterly statements. Each investor must calculate the ratio to get a more precise breakdown.

SOURCE: http://www.financial-planning.com/fp_issues/2011_11/the-411-on-401ks-muckraking-firms-retirement-plans-2675698-1.html