What is the Plan Veriphy Score vs Client Portfolio?

Plan Veriphy Score vs Client Portfolio

Veriphy Scores are decision-making tools that plan committees can use to help them anticipate the retirement readiness of their workforce. 

Veriphy Scores are built by evaluating every 401(k) plan as a unique plan with multiple asset class holdings over a period of time.  The performance (returns) of the plan investments overall are measured relative to their asset class benchmark returns.  If the Veriphy Score is in the “red” then it is performing in the bottom 25% of the plans in our universe; if it is in the “green” then it is performing in the top 25%.

In addition, the Veriphy algorithms include a measure of the volatility embedded in each plan investment and these are compared to their respective benchmarks. The combination of relative returns and relative risks delivers a measure of value added to a plan net of fees.  This is something that fee benchmarking cannot deliver.

Measuring plan outcomes net of fees gives plan fiduciaries the feedback they need to make decisions that matter.  It literally shows plan fiduciaries how well the plan has performed on a risk adjusted basis.  To prove this point for oneself, you simply need to ask yourself … would anyone evaluate a business purely on the cost of goods.  The answer is likely “no.” In addition, and more importantly, fees are measured in basis points. 

Click the gauge to download the Product Overview PDF

A basis point is 1/100th of a percent.  Outcomes are measure in percentage points.  A percentage point is 100 times larger than a basis point.  So, why does everyone want to measure fees?  Well, it is easier.  Measuring outcomes requires a significant amount of insight, understanding and math.

Learn how Veriphy® calculates and illustrates the Performance side of the equation by measuring the annualized return of the entire plan and comparing it to a neutral benchmark built specifically for each plan.  

Are Your 401(k) Plan & Fund Benchmarks Valid?

It’s crazy to think about, but quite often investment benchmarks are simply assumed to be correct.  I recently saw a set of target date suite funds benchmarked to the S&P 500, and this was done by the fund family.  Okay – so I am not going to mention any names here, but … that is truly ridiculous.  

Target Date Funds are actively managed asset allocation investments.  The S&P 500 is an index that measures the value of the stocks of the largest 500 stocks (based on market capitalization) in the New York Stock Exchange.  This is like comparing elephants to eagles because they are both living creatures.The standards for benchmarking are well defined by the CFA Institute in their Global Investment Performance Standards (GIPS).

According to GIPS, investment strategies generally fall into one of three categories: 

1. Benchmark Relative: In this category, investment decisions are made relative to benchmark weights, exposures, and risks. The portfolio may be very similar to the benchmark in this instance (e.g., passive and active index strategies). 

2. Benchmark Aware: In this category, benchmark relativity is observed or the benchmark serves as an investable universe. Generally, there will be distinct differences between the portfolio and the benchmark (e.g., concentrated strategies). 

3. Benchmark Neutral: In this category, benchmarks are treated more as target returns or hurdles to beat or there is no appropriate benchmark. This is common with absolute return and alternative strategies and for strategies not covered by index providers. In these instances, a predefined target return that is not based on a market index may be used.

In the retirement plan fund evaluation space, “Benchmark Relative” is most common.  Target Date Funds should be benchmarked to similar fund types … not the S&P 500 Index.  This holds true with many other asset classes, and the purpose of this communication is to get plan committee members to pay close attention to benchmarks.  

If benchmarks are incorrect, then funds may get removed or added to the plan for the wrong reasons, and that can lead to poor plan performance.  Here is an article on the differences between types of bond funds. This is an issue that we addressed at Veriphy Analytics for the last three years.  Morningstar recently bifurcated bond funds into two asset categories instead of one. That is an excellent change and the article explains why.


Feel free to reach out to me with any questions or comments.  

The Veriphy Score - Like a FICO® Score

Topic: Veriphy® Analytics Learning #2 - Plan Risk, The Veriphy Score and the Plan Veriphy Score vs. Universe


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How Plan Performance Is Calculated

Topic: Veriphy® Analytics Learning #1 - The Plan Performance Tool
Start Time : Aug 15, 2019 11:29 AM

Three Key Resources for Successful Fiduciaries

Often, there is just not enough time to get things done. Especially when it comes to retirement committee duties.

So, things get delayed and put off.  Yet, you know they will come back to haunt you. 

Then crisis strikes! It no longer matters that you did not have time to address it earlier, it is now red flag urgent. It has to ‘get done yesterday’. This all-sound familiar? 

It happens to most of us. It is especially true for successful HR and Finance professionals.  Competing priorities take away attention from their plan duties and creeps up on them and all of a sudden, it becomes a necessity.  So, successful fiduciaries work on outsourcing some or a large portion of their duties.

Here are three resources that can be very helpful for plan fiduciaries before a crisis strikes

  1. www.401kbestpractices.com … “how to” tools mainly for advisors, but plan fiduciaries could learn a lot from understanding how an advisor might approach your situation.
  2. www.fiduciarywise.com … the brainchild of Don Jones, this a true full-service plan fiduciary to run your plan when you do not have time to do the work and want fiduciary oversight to be done right
  3. https://www.forusall.com/401k-blog/401k-compliance-calendar/ a well done fiduciary calendar to help oversee plan operations.

SEC Reg BI’s Limited Retirement Plan Impact (from 401(k) Specialist Magazine)

I know, more acronyms.  Reg BI stands for” best interest regulation. A comprehensive package of rules and interpretations adopted June 5 by the Securities and Exchange Commission. It imposes enhanced standards on broker-dealers and spells out the duties for registered investment advisors (RIAs) in the retail investor space.  The new Regs are mainly focused on individual retirement accounts (IRAs), health savings accounts (HSAs) and retirement plan rollover advice.

The new guidance will have only a little direct impact on benefit plan sponsors but could affect how plan participants receive advice on their plan funds.

Here is the article.

The Target Date Fund (“TDF”) universe – they are not all the same

I saw a target date evaluation tool recently that stated that there were more than 30 TDF series in the marketplace.  While the statement is correct, the number is WAY off. Did you know there are now over 140 unique target date suites available in the marketplace?  This can create massive confusion in the evaluation process. They are all different, yet they often get compared against one another with very little regard for their risk/return characteristics.  You need an expert investment advisor to evaluate the funds. In addition, Veriphy Analytics a leading-edge provider of 401(k) and 403(b) plan business intelligence and “outcome analytics”, delivers elegant insights on the actual impact that TDF funds have on a Plan’s participant outcomes.  The result is a feedback loop that provides decision tools for a plan fiduciary. Click here to set up a demo.

Truth, Lies, Purple Bell Bottoms, & Powerful 401(k) Secrets …

What is old is new again.

I remember wearing my purple bell-bottom jeans to high school and thinking I was so cool.  When I look at the pics … well, it’s a bit embarrassing. Yet bell-bottom jeans are making a comeback.  I saw them on the web. The color was “tawny port.’ Still looked purple to me. It was fun to remember.

Also, this week, I encountered an “old is new” 401(k) plan fee negotiation.  Let’s just say that proprietary funds are making a comeback. It reminded me of the early 2000’s.  They’re just being repurposed in a different package.

So, here was the offer … we are going to reduce your recordkeeping fee significantly and we would like you to use our lower cost “collective trust-based” target date funds instead of the mutual fund product you have been using.  The end result will be a 50% savings on your recordkeeping fees and you’ll still get our incredible investment management services.

Since this was an unsolicited offer, the first rule of fiduciary duty is buyer beware.  Nobody is working for free. 

You might want to believe that your vendor is simply doing this because they love you so much as a client and what’s not to love!  You are a great client. Right?  

Here’s your first fact: recordkeeping vendors with proprietary products are in business to maximize THEIR revenue, not to minimize your Plan costs.  So, it is your duty as a fiduciary to understand all the facts and dig into the details. Find a balance using transparency and accountability.

Find and stick to the facts:

A 401(k) Plan with $286 million in assets and 2250 Participants (all publicly traded mutual funds with a combination of passive and actively managed investments), and about ½ of the plan’s assets were in proprietary target date mutual funds. 

Recordkeeping costs were set at 9 basis points (that is 0.09%) based on plan assets.  The plan sponsor was told this was a “required revenue rate.” So, the cost for administration recordkeeping and related services to this plan was just over $114 per participant. This rate was a bit high based on my experience in measuring these plan costs and also high compared to benchmarking data.

Recordkeeping costs were simply paid through revenue sharing that was collected by the vendor.  This is a very common structure, but one that prudent fiduciaries avoid in general. It is generally better to negotiate a fixed fee based on the number of account balances in the plan.

Then, just like the add for those “tawny port” bell-bottoms telling me I’m gonna look awesome … the vendor says they want to introduce lower cost “collective trust” investments into the mix and will reduce the recordkeeping fee to 5 basis points.  A 44% reduction in cost. This sounds like utopia. Collective trust funds are “hot” in the marketplace because they often have lower expenses than mutual funds.

What is going on here?

In order to see the game, you need to look into all the details, not just what’s on the surface.  

Here are basic facts:

  1. Recordkeeping services would remain the same, so the reduction in fees sounds great.
  2. All funds in the Plan would remain the same with the exception of a change to the use of collective trust Target Date Funds from the same fund family.
    1. This offer would reduce the cost of target date funds by approximately 15%
  3. The recordkeeping cost would be reduced by 50% and the overall cost of funds would be reduced nearly 8%.

Sounds like a no-brainer.

Here is what was not disclosed:

  1. The Target Date Fund’s have multiple share classes being offered and it was the most expensive share class that was proposed (Yes, it was still less expensive than the current mutual fund offering)
  2. The least expensive class of TDF’s in the Vendors stable was literally 50% less expensive than the class that was offered to the Plan Sponsor!
    1. That difference can be translated into increased profits for the recordkeeper with proprietary funds. 
    2. In fact, it results in an additional $200+ per participant in annual vendor profit. Yes, that is $450,000 which is almost double what was being paid before. 
    3. So instead of a reduction in recordkeeping cost, it appears that the vendor has increased their fees for recordkeeping service nearly 250% by hiding the fact that lower expense collective trust funds were available.
  3. The Plan Sponsor was duped … what looked like a huge reduction in cost, was actually a massive increase.

How can that happen.  Well, Collective Trust disclosures are not as rigorous as mutual funds in general, but that was not the problem here.  

The Plan Sponsor (and their Advisor) were simply unaware of the lower cost classes available to the plan.  Being unaware is terrible when you are a fiduciary!  

Al is the Co-Founder and CEO of Veriphy℠, a 35-year veteran of the financial services industry and has spent the majority of his career as an independent RIA. Al is the Co-Founder and CEO of Veriphy℠, a 35-year veteran of the financial services industry and has spent the majority of his career as an independent RIA. 

Say this:

“Please provide all the collective trust share classes offered, their performance history and their investment expense.”

So, get real and ask the hard questions – get transparency.  You’re not going to look good in those purple bell-bottoms. And, if you are a Plan fiduciary, good facts are far more important than looking good.  

Click here if you’d like a no pressure discussion on plan fees or plan value received.  It’s free if you subscribe to our email newsletters.

HR Tech to Improve Outcomes & Reduce Prep Time

1. Using AI Tools and Data Analysis can eliminate the confusion of Plan Committee meetings

The goal of most plan committee meetings is to understand current plan dynamics and outcomes and take appropriate actions when needed.  Unfortunately, the typical delivery of information simply creates confusion and, in many cases, causes professionals with 27 other things on their plate for the day to simply check out.  When clear understanding and knowledge is the end goal for plan fiduciaries, and HR tech can provide the time to focus on understanding by delivering clear elegant data up front.

Charlene Edwards, previously VP of HR at Kloeckner Metals, one of the largest metals manufacturing, supply, and service companies in North America , explained via email. “Where many people view HR tech as a human replacement, I view it as a bridge to a very real gap between HR and plan outcomes analysis.  HR Tech, implemented properly, can actually add to the human element the industry has lost sight of in the past.”

Ms. Edwards said she believes HR pros can get overwhelmed with the over analysis and investment jargon associated with Plan Committee discussions and reporting, making it impossible for them to be more proactive in their plan committee discussion. By using artificial intelligence and deep data analysis, they’re able to focus on making decisions that benefit their plan participants and bringing the best decisions to bear quickly.  A focus on using HR Tech to take the complex and make it elegant and simple to understand is what aligned her with their investment advisor – Retirement Fund Management in Atlanta, GA.

Tip: Help plan committees be more productive and motivated in their decision process by first understanding what opportunities for improvement are holding the 401(k) or 403(b) plans back. Before signing up for HR software, ask committee members what is preventing them from understanding plan outcomes. Then, research which software can take care of these tasks and free up their time to target the decision-making process.

2. Provides mission critical information on demand

Veriphy Analytics, Inc.There’s no doubt that things in a Plan Committee meeting move fast.  HR Pros are often asked to process reams of financial data in minutes and then decide on some change to a fund in the line-up.  So, investment professionals often forget to stop and ask Committee members for feedback.

Chip Hunt, Founder and President of PrimeTrust Advisors https://primetrustadvisors.com/, and one of the top performing Plan advisors tracked by Veriphy, said he believes that the introduction Plan Outcomes feedback provides the mechanism to deliver high quality decision-making advice to plan fiduciaries without diving into all the investment analytics that often cause committee members to check-out.

“The emergence of plan outcomes feedback helped to change this by encouraging committees to ask key future focused questions, instead of waiting for an annual review,” Hunt said via email. “Creating an environment in which it’s okay to address the brutal facts, regardless of where they are coming from, means that information flows more freely throughout the committee meeting and leads to better decisions.”

Enhancing feedback through plan outcomes transparency, especially by offering the autopsy without blame, gives committee members the information they need to have a more meaningful dialogue on critical plan decisions.

3. Trust but Verify

One of the key relationships that exist for HR leaders is the one between them and the retirement Investment Professionals.  This is a relationship that generally has a high degree of trust. If that trust is missing, it may be time to find a new investment professional.  That “high trust” however, needs to be checked against performance.

In the past, measuring value added by investment recommendations was elusive at best.  However, with the introduction of data analytics and artificial intelligence, it is now possible to measure the performance of a plan vs. its unique benchmark.  This is a process developed by Veriphy Analytics and is patent pending. Plan dashboards are used to understand:

    • Has value been added to our participant accounts?
    • How much value has been added over time?
    • How does that compare to the fees we paid?
    • Do we have opportunities for improvement?
  • Which opportunities should we address first?

With the lack of time available for in-depth performance analysis, dashboard provide an elegant way to understand plan dynamics quickly.  This gives the committee the ability to make prudent decisions quickly and accurately.

  1. Improved Decision-Making Leads to Improved Financial Health

With AI created dashboards and drill downs focused on pinpointing where and when value is received, Plan Committee members are able to take what were once limited and confusing standard set of procedures and create improved, more decisive changes for their Plans. Such experiences are especially relevant for improving the financial health of a Plan’s participants and this leads to improved Corporate financial health.

Tip: With tools like Veriphy Analytics PlanView Report, a business intelligence platform for 401(k) Plan Committees, fiduciaries are able to see where value has been added, calculate how much value and determine where it came from.  This is delivered in a simple and elegant set of graphics on an interactive dashboard. The platform allows users to be shown and to choose from a variety of screens to find the improvement opportunities that are right for them.

Whether simply trying to understand how a plan actually performs or to determine the details of value attribution, Plan Committees need tools individualized to their needs — not everyone else’s. With HR tech, professionals like Retirement Fund Management (RFM) https://rfm401k.com/ now have the tools to measure and monitor through improved, Plan Outcomes analysis.