Is Your 401(k) a Dog or a Darling?

Last Updated Nov 17, 2009 9:15 PM EST

There's a lot of debate about whether 401(k) plans are failing American workers. Publications ranging from CBS MoneyWatch to Time Magazine have reported on their relative failings, as well as on some of the success stories. But there's no doubt that some plans are dogs--failing every employee forced to deal with them.

These plans have high costs, poor investment options and stingy matching programs, said Mike Alfred, a San Diego money manager and founder of a 401(k) plan rating service called Bright Scope. Some of them also fail to get workers to contribute, which means those workers will have less at retirement age and may have to work longer.

In fact, the difference between a good 401(k) and a bad one amounts to hundreds of thousands of dollars for the average worker, Alfred told me in a recent interview. That can mean that a person in a bad plan would have to work decades longer than somebody in a good plan to have the same sort of financial security in retirement.

For example, the average employee at Lockheed Martin has $180,000 balance in his 401(k), which offers great, low-cost investment choices and a generous company match. Comparatively, the average worker at General Motors has just $52,000 in his 401(k), which has poor investment options and poor company matching contributions. The bottom line: the GM worker is likely to enter retirement $175,000 poorer, according to Bright Scope.

Want to know how your plan rates? If you work for a large company, they're likely to have a bead on it already. You can feed the name of your company into the search bar and get a 1-100 rating, which notes the major components of the analysis, such as fees, investment options, company matching and employee participation rates. It will also tell you what the highest-rated plan is in your industry; the lowest and how much you could be losing by having less-than-perfect options.

So if you work for Google, for example, you could find out that your plan rates an 80. Its high score is based primarily on the plan's extremely low fees and a great company match. The bad part is that the investment options aren't great, according to Bright Scope. But that plan fares far better than the one offered by Freedom Communications, (owners of the Orange County Register), which scores a paltry 35. Why? Rotten investment choices and a low participation rate. The plan fees and company matching programs are above average, according to Bright Scope, but not great like they are at Google.

However, if you work for a smaller company or are part of a secondary plan (as you could be if you work for a subsidiary or your company has separate union and non-union plans) it may not be rated on the site--yet. Alfred said he's got 18,000 plans in the system now, which accounts for about 80% of the plans that have more than $100 million in assets. But he's trying to double that by the end of the year.

In the meantime, he gives workers the ability to submit data on their plans, so they can speed up the day that they'll be rated.

What's the point in the ratings? Alfred thinks that by making the plans more transparent and easy to compare, the market for 401(k) plans will become more efficient and the plans will become better. Right now, there's little public information about specific plans. The information that is available is tough to compare. That makes it possible for 401(k) vendors to charge high fees simply because their customers (company plan administrators) don't know better than to pay too much, he said.

"In an efficient market, you would expect to see a tight band. You'd expect, for example that every plan that had $100 million in assets would pay roughly the same amount in investment fees," he said. "But here there is a huge dispersion in quality. The plan sponsors are not getting enough data to understand the impact of their decisions."

His goal is to create something like the real estate industry's multiple listing service, that allows you to compare the selling price of one 2,500 square-foot house to another.

"It's like looking at two identical homes located right next to one another. If you knew that one sold for $700,000 and the other sold for $1 million, you'd say that somebody got robbed," he said. "We're trying to make that comparative information available in the 401(k) market."