Growth

Rich and Co.

Asking Serious Questions Of BrightScope

This was sent to us by a very successful, expert and respected expert TPA.  These are complex matters and difficult for advisors to understand and learn about.  They asked to remain anonymous because of concerns about Bscope’s largely hostile-aggressive public behaviors and PR.

You decide.   Note: If you wish to submit additional information, confidentially, we can make a forum available.

Disclosure:  We offer no services for retirement plans, plan sponsor or participant and investors or any services related to or competitive with BScope.

Questions on BScope Methodology
Fact is the real issue. So many state an opinion that has no basis. If no one challenges then the impression for the uninformed is that the opinion is a fact. The key is to ask how, why, what is the basis.

As with everything there are unintended consequences. So my questions include:

BScope, for a plan with $20M in assets, how would you rate the investment menu below that also includes risk based models comprised of the investments that are in the plan, at no additional cost?

  • DFA US Large Cap Value
  • Vanguard Small Cap Index
  • DFA Intl Value
  • DFA Small Cap Value
  • DFA Emerging Mkts
  • ValueVanguard REIT
  • Templeton Global Bond ADV
  • Vanguard Wellington
  • Vanguard Total Bond Market

I assume that the answer would be “great” choices. The next question, if great, then why did the plan receive an “above average” for investment menu quality? What would BS consider a “great”? What is the criteria? It would seem more transparent if BS described their criteria for great and each category below.

  • The 2009 5500 information is now 15 months old. What if the funds were great in 2009 but now they are not good. Is 12-31-09 investment menu scored using 12-31-09 information or is the menu scored on today’s information that was not available 12-31-09?
  • Suppose that the funds were originally good but fell from favor in 4q 2009 and were changed 1-1-10? Should a plan be penalized because the fund change took place 1 day after the end of the year?

What is the criteria for plan participation, company generosity?
If account balances are low, perhaps it is a startup plan and all else is terrific, should this plan be penalized?

  • How are “low fees” determined?
  • Does it include just service providers or service providers and investment costs?
  • Is low cost a plan with fees less than say 75bps? Fees that are less than $10,000? Or is it low cost compared with the peer group fees?
  • How is the peer group decided? How many plans in each peer group?
  • Who decided on the criteria? What are their credentials?

Advisor Conflicts and Risks?
Since BScope wants to sell plan information to advisors, is it in their best interest to give plans a lower score?

  • Low scores, provide more opportunities for advisers and advisers more willing to pay BS for their services?
  • Perhaps a conflict of interest by those who programmed the undisclosed methodology used in the algorithm?

Real Life Example
Fact-Base:

  • We are working with a plan that shows recordkeeping fee on the 2009 5500 as $6250.
  • The plan is with a large national proprietary record keeper who limits the number of non-proprietary funds.
  • The plan could use a share class of a fabulous fund that does not have any 12b-1 fees, but the record keeper only allows the share class with 12b-1 fees, which they keep.
  • The record keeper’s funds have revenue sharing and all revenue sharing is kept by the record keeper.
  • The total fee paid to the record keeper is $48,000, not $6250. (we have I n writing the RK acknowledgement of the revenue sharing and that they keep it)
  • An independent record keeper proposed a fee of ~ $9600 with no fund restrictions and revenue sharing (if any) is returned to the plan to offset plan expenses.

BS score says low fees for this plan, which for the recordkeeping, seems to be rather misleading. Unless, someone is willing to really dig, (which we are really good at), there is a false sense that fees are reasonable, missing the opportunity to save $39,000 or about $200/participant.

Role of True Benchmarking
A benchmark should account for the differences in services, fiduciary responsibility, E&O Insurance, education and credentials of service providers. There are other benchmarking providers that get information from the plan’s service providers and then benchmark the plan against others in the peer group.

The peer group is not just by industry but also by # of participants and assets size. The benchmark provider we use, does not sell plan data to anyone so I am comfortable that my client’s information will remain confidential. This provider also considers qualitative data such as plan complexity, services.

There are 2 parts to the mandate, reasonable fees, FOR SERVICES PROVIDED. Not everyone wants to shop a Wal-Mart. 

Rating a plan, based only on the 5500 in its current form, is irresponsible and can be harmful to the participant. “

Advertisements

Written by Rich and Co.

March 25, 2011 at 10:39 am

Posted in Uncategorized

%d bloggers like this: