How do I know if I have a good 401(k)

By Mark Folgmann

In today’s uncertain environment where few trust Wall Street; it’s fair to wonder if your 401(k) is structured and monitored in a prudent way. Most companies slap a 401(k) into place, let the advisor pick a basket of funds and hope it all works out. Sure they review the funds once per year but really never get to the bottom line; is my retirement account going to be fully funded the day I retire? If not, what changes need to be made to assure that happens. I mentioned countless times in previous articles that the 401(k) is not a product; it’s a delicate income producing system that needs constant care by trained fiduciaries who understand the critical questions to ask in order to improve employee’s retirement income.
For the first time there is an independent rating service for your 401(k), a start-up out of San Diego run by brothers Mike and Ryan Alfred. You can access the rating system as a plan sponsor or employee by visiting www.brightscope.com. Since Brightscope is a start-up it does not have all plans in its system yet but just passed a milestone of rating its thirty thousandth plan and also just released their top 30 list of 401(k)s for 2009. They have developed a rating algorithm that calculates a single numbered score for each and every 401(k) evaluated which falls between 1 and 100. Currently the highest rated company score is 96 and the lowest is 26 and this score is derived from over 200 data points such as plan cost, investment quality, contribution rates and company generosity. A score of 100 would indicate a typical employee would be able to retire and walk away with a million dollars on a working salary of fifty or sixty thousand dollars. They also translate this number score into how many additional years the average employee will have to work because his company has an inferior plan. The companies that were rated best in class for 2009 have average employee balances over $350,000 and scored in the 90s with over 15,000 employees. The weakest plans might have average employee balances of $15,000 or less than one year’s current income. Remember this is not the only factor since there are 200 data points but average account balance is a very good starting point. They also do an excellent job of uncovering most of the plan cost including trading cost for investments which many times can double the overall cost of the plan.
I had the pleasure of spending time with both Mike and Ryan Alfred at a recent Independent Fiduciary Symposium hosted by Matthew Hutcheson in Boise Idaho and can attest to the passion these young men have about the future of 401(k) improvement that will be driven by an independent rating system much like Morningstar rates individual mutual fund. Any employee or employer can go to Brightscope to check if your companies plan has been rated. If your plan has not yet been rated you can follow instructions on the website to input data and have your plan evaluated. Since Brightscope does not receive any funding from the financial service industry you can be sure you will get an unbiased review of your plan and there is no fee to have your plan evaluated. Once again this is an example of an innovative approach to improving our futures by a private company that was started because they saw the need for third party independent evaluation of our retirement plans. Remember this is information that Wall Street does not want you to know and they spend million and millions each year fighting full disclosure with their lobbing efforts.