BrightScope Streamlines Plan Component Ratings

Since our launch in 2009 we have seen steadily increasing usage of our ratings by sponsors, providers, advisors and the press, and have recently set new high water marks in traffic and paid subscribers across our product suite. While our BrightScope Rating system is used widely, we will continue to seek improvements that ensure the BrightScope ratings reflect the evolving best practices in the marketplace.

BrightScope  recently made three changes to streamline the process of comparing company retirement plans through our Plan Component Ratings.   We initially created the “Plan Component Ratings” in parallel with the BrightScope Rating with the launch of in January 2009.  The BrightScope Rating measures the ability of your plan to get the average 401k/403b participant to retirement and is calculated by running thousands of simulations using plan-specific data.  The Plan Component Ratings are calculated separately from the BrightScope Rating and do not sum up in any way – linearly or otherwise – to the BrightScope Rating.  The Plan Component Ratings provide an easy-to-understand analysis of each of the health and performance categories of a 401k plan, independent of its BrightScope Rating.

One major decision with the Plan Component Ratings was how to best measure the “Investment Menu Quality” of a plan in a purely quantitative manner. We ultimately chose relative Sharpe ratio loss as the metric on which we would base this comparative rating.   The ideal menu from a relative Sharpe ratio loss standpoint is one that provides as much diversification opportunity as possible to the participant, while maintaining returns that are similar to those of the benchmark indices.   Although the menu had the potential for outstanding risk/reward characteristics the majority of funds will flow into the default investments choices and none of the participants may have knowledge of the optimal mix of assets.    Given this we did two things.  First we partnered with Target Date Analytics on a grading system for Target Date Funds which are the most common default investments.   Secondly, we shifted from the relative Sharpe ratio loss calculation score to a simple complexity score for the fund lineup… how many funds.

Here is the simplification of the “Investment Menu Quality” Plan Component Rating.

Another opportunity to improve the utility of the Plan Component Ratings was to enable the user to select the peer group for our comparisons.   Previously, the only peer group for Plan Component Ratings was “All Plans”.  Now through a pull down menu either all plans or plans of similar size can be selected as the peer group.  Small plans are best compared against other small plans.  Large plans need to be compared against other large plans and not the entire database as smaller plans typically perform lower across the board for every plan component.

Now through a pull down menu either all plans or plans of similar size can be selected as the peer group.

Our last change in the Plan Component Ratings was our “under the hood” method of calculating for “Total Plan Cost”.    Under ERISA “(T)he participant must be provided directly or upon request with a description of the annual operating expenses of each designated investment alternative which reduces the rate of return of the alternative, such as investment management fees, administrative fees and transaction costs, and copies of any prospectuses, financial statements and reports, and of any other materials relating to investment alternatives available under the plan.” In order to help ERISA fiduciaries fulfill their obligations, BrightScope developed an algorithm that quantified transaction costs for mutual funds, collective trusts and separate accounts and incorporated this in the Total Plan Cost estimate for the plan.   Feedback from ERISA fiduciaries was very positive, but this was source of confusion for plan sponsors on why our fee estimates did not line up with the numbers from their plan provider which rarely included a transaction cost estimate.   Earlier this year with participant fee disclosure coming BrightScope decided to remove the transaction cost component from our Total Plan Cost estimates specifically to enable plan sponsors and plan participants to see fee analysis with the same basic categories they will see in the annual plan disclosures.

Here is the simplification of the “Plan Fees” calculation with “Transaction Cost” removed.

We put a lot of thought and consideration into these changes and believe they have already been well received by the marketplace. We will continue to make decisions that are in the best interest of 401k/403b participants and seek to drive the best retirement outcomes. Please feel free to contact us if you have any questions.