How Good is Your 401K? Ask BrightScope

The Secret Life of Fees in Your 401K

A few years ago, I mentioned that I used a target-date index fund in my 401K. A reader came out and bashed me pretty hard for that move, saying I was overpaying to save for my retirement. I was frazzled, not because of the comment, but because it was really hard for me to figure out how much I was actually paying in fees and defend my position.

For the next couple of weeks, I went on a mission to discover how much I was actually paying in fees to invest in my 401K. The results were not that bad compared to the other choices in my 401K plan. However, I was disappointed that it was so hard to determine. Thanks to some nice folks in the Get Rich Slowly forums for helping me weed through all the fee details.

If you have a 401K it’s possible that you’ve wondered the same thing: “How much of a cut are these guys taking?” And, “when is it worth stopping my contributions to a 401K to start investing in a Roth IRA with lower fees?”

Now there is a group determined to shed some light on the secret world of 401K fees. They are called BrightScope. I spoke with the co-founder and CEO of BrightScope, Mike Alfred. He shared with me some interesting stats, plus the basics of what BrightScope does.

Is the 401K Match Coming Back?

We first discussed the 401K match, something a lot of companies had done away with temporarily. Mike shared that despite the loss of the match, the savings rate for 401K participant had not dropped. People are still putting money into their 401Ks. We discussed a recent study concerning the return of the 401K, and although Mike agreed with the optimism of the results (the match will be returning for most companies), he found the study to be limited by the small amount of participants.

About BrightScope

One place that doesn’t use a small study group is the BrightScope website. They have over 33,000 401K plans included and rated using the BrightScope rating system. This is around 66% coverage of all the 401Ks in the US. What BrightScope does is gather all the data they can get on your company’s 401K plan. This includes things like fees, match, etc. They then compare this plan to a peer group of similarly sized companies. The result is the BrightScope Rating.

The BrightScope Rating is an industry standard quantitative 401k plan rating developed by BrightScope, Inc. with the help of leading academics and independent 401k fiduciaries. The BrightScope rating algorithm calculates a single numerical score for each 401k plan in the country after considering over 200+ individual data points in broad categories such as total plan cost, company generosity and investment menu quality.

How to Use BrightScope

I asked Mike how readers should go about using BrightScope. He suggested the following: (1) visit BrightScope and determine how well your company plan is performing; (2) determine how much in expenses you are paying; (3) share your rating information with your company’s HR department and ask about improving your rating; (4) leave comments on BrightScope.com for others to read. Here’s a snapshot of the BrightScope Rating (I applied it to BOA’s 401K):

Why Fees are So Hard to Find

I asked Mike why 401K fees are so hard to find. He didn’t have a direct answer but he gave me this nugget. Prior to the 80′s, most employers used a defined-benefit pension plan as the main benefit to provide their employees a secure retirement. With a pension, the company controlled all the investment decisions. There was no need for the employee to be aware of the fees, investment choices, etc. The employees would be taken care of. The risk was on the employer to make the right decisions.

Then along comes the 401K, the employee controlled plan, where a benefit is not defined, but the risk is shifted to the employee. Mike says that although employees are now responsible for their own retirement, they didn’t get full control of investment choices and they didn’t get the necessary information to help them make the decisions they need to make.

BrightScope is now helping to create the shift in choice and disclosure that is long needed in the retirement investing world.

What Others Are Saying About BrightScope

401K Fees: See What You Are Really Paying at Christian PF
How to Uncover the Secrets of Your 401K at Dough Roller

What if Your Company’s 401K is Not Yet Rated by BrightScope?

The company I work for has not been rated by BrightScope just yet. Mike assured me that they are getting to it. But he also pointed out that I can help. You can actually submit data to BrightScope. Click on the “Provide Us with Data” link and you’re taken to a page where you can upload specific plan documents. This will help BrightScope provide a rating for your company faster.

You can still find out your 401K plan fees by completing a Personal 401K Fee Report. It’s free to complete and will shed some light on the expenses of the funds in your 401K.

How to Figure Out Your 401K Expenses

Also, I ran across a nice 401K expense calculator in Money magazine this month that I thought I would share.

Step 1: Tally Administrative Costs

  • Go to your plan’s summary annual report. Find the “basic financial statement” section.
  • Subtract “benefits paid” from “total plan expenses.”
  • Divide that number by the total value of the plan.
  • This number is your plan’s administrative cost.

Step 2: Calculate Investment Fees

  • Multiply your fund expense ratio by your balance in the fund.
  • Divide those total fees by your total balance.
  • This number is your investment expense.
  • *If you have only one fund (i.e. target-date fund), your investment expense ration is the ratio on this one fund.

Step 3: Add Administrative and Investment Fees

So what are your thoughts about 401K fees and the rating system provided by BrightScope? Let me hear from you in the comments below…



Last Edited: April 8, 2011 @ 10:14 pm
About Philip Taylor

Philip Taylor, aka "PT", is a husband and father of two. He created PT Money back in 2007 to share his thoughts on money and to meet others passionate about managing their finances. All the content on this blog is original, and created or edited by PT. Read more about Philip Taylor, and be sure to connect with him on Twitter, Facebook, or view the Philip Taylor+ Google profile.

Comments

  1. I actually never knew I was paying “Administrative Costs” in addition to my individual fund Expense Ratios and investment fees (ex. 12b-1 fee)!
    In what form are these administrative costs passed onto the individual participant in the 401k?

  2. Now this is the kind of info that got me started reading blogs. Simply fabulous!

    Thanks for putting the time and effort into sharing this with us!

  3. @Stay – Yeah, those admin costs were new to me as well. They hit you with them when you purchase new shares (i.e. make contributions).

    @Lean – That’s nice of you to say. I enjoyed writing this one for sure. And interviewing Mike was fun. Very cool guy.

  4. That is a great article and Brightscope is doing good work.

    In a 401(k) plan, your account balance will determine the amount of retirement income you will receive from the plan. While contributions to your 401k account and the earnings on your investments will increase your retirement income, fees and expenses paid by your plan may substantially reduce the growth in your account. The following example demonstrates how fees and expenses can impact your account.

    Assume that you are an employee with 35 years until retirement and a current 401(k) account balance of $25,000. If returns on investments in your account over the next 35 years average 7 percent and fees and expenses reduce your average returns by 0.5 percent, your account balance will grow to $227,000 at retirement, even if there are no further contributions to your account. If fees and expenses are 1.5 percent, however, your account balance will grow to only $163,000. The 1 percent difference in fees and expenses would reduce your account balance at retirement by 28 percent.

  5. TheLoneRanger says:

    401K fees can be quite expensive. Besides fund expense ratios, there are also trading costs (how much it cost to actually buy and sell securities inside the funds). These are often not listed in the prospectus but in a document called SAI – statement of additional information. If you fund has a turnover of 100% it could mean additional expenses of up to or over 100 basis points (1%). Add this to your expense ratio and admin costs and funds can add up.

  6. Great piece. Brightscope’s work needs to be publicized. It is an important force bringing investment costs down.
    I would like more info on how they rank investment choice.

  7. This is useful; I’m still struggling to figure out exactly how to pick where to allocate my 401k (and sadly I’m not in BrightScope — that looks really useful). I find it annoying that you have to pick & search for this information, when it should really be right there in front of you to make a good decision!
    I’m looking at my Basic Financial Statement from my Summary Annual Report, and it says :
    “Benefits under the plan are provided through insurance and through a trust fund. Plan expenses were $211,988. These expenses included $225 in administrative expenses and $211,763 in benefits paid to participants and beneficiaries. A total of 201 persons were participants in or beneficiaries of the plan at the end of the plan year.”
    So… um… does that mean that my plan expenses were actually $225 (for the company), making the cost to me about $1.12 per year (225/201 persons)? Or am I not getting it?