Opinions May 4, 2011

IMHO: The Enemy of the Good?

May 4, 2011 (PLANSPONSOR.com) - Over the past couple of years 401(k) evaluation service BrightScope has made quite a splash. 
Reported by

Early on, most folks I spoke with were quite keen on what was being undertaken by the firm.  401(k) fees were unfortunately still mystery meat to many plan sponsors, and thus a service that purported to help them make sense – not only of what they paid, but how it compared to other programs – looked to be a godsend.

As time has worn on, there have been questions and concerns.  The data that underlaid Brightscope’s computations was drawn from government files – and while that made it “official”, it apparently didn’t always mean it was accurate, and it surely didn’t make it timely (though the latter is getting better all the time).  Moreover, BrightScope employs a proprietary methodology that relies on certain weightings and assumptions that not everyone would agree with – but then, it’s a proprietary methodology, after all.  If you don’t like it, or don’t think it does a fair job of representing the real situation, one has only to say so. 

For more stories like this, sign up for the PLANSPONSOR NEWSDash daily newsletter.

What made them different, at least at the outset, was that they went public with that information – and by public, we mean all the way to retail participants – with data for a vast number of plans, and with a good deal of press coverage, to boot. 

That created a modest amount of consternation for some plan sponsors and advisers – not because they had a problem (though some surely did), but because the data presented to the public about their plan and its relative competitiveness vis-à-vis other programs (particularly on the sensitive issue of fees) was, as noted above, incomplete, inaccurate, and/or out of date.  None of which the BrightScope folks contested, by the way.  But in the couple of conversations I have had with them on the subject, their response has been “if our data is wrong, tell us and we’ll fix it.”      

A “New” Focus?

Last week BrightScope turned its attention to financial advisers with its BrightScope Advisor Pages (see Brightscope Turns its Attention to Advisers); not to rank them or rate them (though who would be surprised to see that come to the fore one day – particularly since there are already placeholders for “qualifications”, “experience”, and “conduct” on the new adviser tool), but rather to provide information to the public.  Data that, like the retirement plan information noted above, wasn’t in one place, wasn’t easy to find, and surely isn’t easy to understand for many.  And then, as it had with the retirement plan analytics information that launched the firm, it rolled its adviser database out – to everyone.

Well, advisers are sensitive about such things (with good reason), and a number have already checked out the database and found “issues.”  Mike Alfred, co-founder and CEO of BrightScope told me last week that “…many of the “errors” we’re being accused of are really just issues with the advisor’s ADV or U-4 which they did not notice until it was published in this format”.  And, as was the case with the retirement plan filings, Mike noted that “Once we get the updated information from a public filing, we will always move quickly to have it updated on the site because our foremost concern is having accurate data”.

Of course, I’m guessing that getting “updated information from a public filing” isn’t an overnight process, and Mike acknowledged that the BrightScope team has been “slammed by a very large volume of incoming requests to claim the Advisor Pages profile as well as general messages of both support and dismay.”  More troubling have been the published reports and emails from advisers who say they’ve been told they will have to pay to have their information corrected (or at least strongly encouraged to do so), though Alfred dismissed that as “totally untrue.”

Still, the public release of data that may be old, inaccurate, and/or outdated is surely cause for some concern, and hopefully speedy remediation by BrightScope.  After all, Voltaire once famously said that the perfect is the enemy of the good. 

But IMHO, the true enemy of the good is more often “not ready yet”.

Opinions May 4, 2011

Where’s the Alpha?

May 4, 2011 (PLANSPONSOR.com) - In funding public sector defined benefit plans, the average assumed rate of return on assets held in trust to pay benefits is 8%. 
Reported by

At least in the short term (the next five to ten years), consultants are predicting that the typical public fund allocation models should generate market returns (beta) of about 6.5%.  Considering that alpha (the return based on skill) is a zero sum game, how are public plans going to possibly achieve 8% – after all, for every winner, there has to be a loser as far as alpha is concerned. 

Here it is important to recognize that even with $3 trillion in reserve assets, public sector defined benefit plans only make up a fraction of funds invested.  A very significant part of the market consists of funds held in 401(k) plans.  Knowing that there will be winners and losers in the quest for alpha, it would appear that the investment professionals with very long-term time horizons (the public defined benefit plan managers) have a decided advantage over the investment amateurs who have finite time horizons (the holders of 401(k) accounts).  Whether or not there will be 150 basis points of alpha for the public funds to capture over the next few years remains to be determined but expecting professional investors with long-term time horizons to generate higher returns than the average 401(k) participant does not seem to be a stretch. 

Never miss a story — sign up for PLANSPONSOR newsletters to keep up on the latest retirement plan benefits news.

Of course, the public fund managers could invest their portfolios in so called “risk-free” investments (see Public Employee Retirement Plans and the Myth of the Risk-Free Rate) and then watch the entire system fail because of the other risks taken on – an outcome that would probably not be all that disappointing to the risk-free rate proponents.  

Epilogue

The party line from the proponents of using a risk-free rate goes something like this.  “If the benefits you are promising are supposed to be 'risk-free,' then you shouldn't be taking risks on investments and assuming you're going to win. Because if you lose, you're simply passing the costs and the risks on to future taxpayers, and that's a dangerous way to run an enterprise.” 

That line of thinking is flawed in many respects.  One is that the fiduciaries who are responsible for administering the plans in the exclusive interest of the plan participants have decades of practical experience to support the risks being taken.  Another is that these fiduciaries are not in the risk elimination business but rather the risk management business and there is a fair amount of evidence to suggest that they have done it very well.  There are numerous examples of situations where risks can be reduced to zero but the costs of going that route make it totally impractical. For example, the risk of highway traffic fatalities and airline disasters can be reduced to zero – we just need to get congress to prohibit the use of vehicles and commercial aircraft – sort of like getting congress to mandate the use of unrealistic assumptions for valuing public retirement plan liabilities – eliminate one risk and create a raft of other problems that are much greater than the risk targeted by the initiative.

As a nation, we ultimately do the right thing but we sure seem to have a need to experiment with a number of wrong things in order to get there.  My prediction is that eventually it will be recognized that the current private sector approach to facilitating retirement income security is fatally flawed with eventual reversions to defined benefit plans as the primary source of retirement income for the masses in the private sector.  It may take a few more failures in the defined contribution arena but I have confidence that there are some very smart business people who will ultimately recognize that the public sector is currently getting it right.

- Gary Findlay, Executive Director, Missouri State Employees’ Retirement System (MOSERS).   

Mr. Findlay is executive director of the Missouri State Employees' Retirement System (MOSERS), a position he has held since 1994. Prior to that, he spent 16 years as an administration and benefit consultant with Gabriel, Roeder, Smith & Company, a national actuarial and benefits consulting firm that specializes in serving the needs of public employee benefit plans. He was CEO of that firm from 1986 until he joined MOSERS.  

Also in this series:  

Public Employee Retirement Plans and the Myth of the Risk-Free Rate

The 401(k) Myth

 

«