In late 2007, Ryan and Mike Alfred were running a fledgling advisory business in San Diego with $10 million under management, when their father, an estate-planning attorney, introduced them to a client, Dan Weeks. Weeks could make no sense of the dearth of information available on his 401(k) at Hewlett-Packard. Like all employee plans, it was subject to elaborate federal disclosure rules. Why were the data to analyze the HP plan properly unavailable? The lack of data on 401(k)s was a subject that also interested the Alfred brothers.

The first time Ryan and Mike met with Weeks, it was just to brainstorm. The Alfred brothers had been in the investment advice business for a relatively short time at that point. Ryan, then 25, was a recent graduate of Stanford University, while Mike, then 27, was a Harvard University graduate. In contrast, Weeks was a 25-year veteran of HP who held five software engineering patents. Despite the age difference, the three got along well. Moreover, they agreed on one important idea: Creating transparency in the $4 trillion invested in qualified plans-the main retirement savings vehicle for nearly 60 million Americans-represented a huge business opportunity.

"Dan had wanted to start a participant advice company," says Ryan. "Mike and I weren't interested in that business and convinced Dan to switch gears and think bigger. After Mike and I came up with the idea of rating 401(k) plans, we formalized our relationship with Dan." In February 2008, they incorporated BrightScope Inc.

Thus began an incredible tale of American entrepreneurship, of a company busting open ugly secrets of the 401(k) business, of a company on the verge of transforming the business of advising 401(k) plans.

Weeks, BrightScope's president now, would be "Mr. Inside." Boy geniuses, Mike and Ryan, would be the front men-articulate and energetic subject matter experts. During the spring of 2008, the trio raised $900,000 from friends to seed the venture. In the meantime, Ryan and Mike did their homework.

In the summer of 2008, the brothers recalled during a recent telephone interview, they flew to Washington, D.C., with the express purpose of visiting the first floor at 200 Constitution Avenue N.W., which houses the Public Disclosure Room of the Employee Benefits Security Administration (EBSA). EBSA is a division of the Department of Labor. The reference librarian was friendly. DOL data are like a haystack, however, and Ryan and Mike needled the clerk with questions for about 30 minutes. Then, Mike asked if they could go behind the librarian's desk to look at his computer screen. The rest is history-and the future of the 401(k) business.

Within minutes of cajoling the DOL librarian into letting them commandeer his computer, Ryan and Mike discovered a goldmine-a vein of data so rich they believe it could make BrightScope a billion dollar company. Turned out, 401(k)s with more than 100 employees must be audited and submit an annual audit report, which is attached to a Form 5500. The DOL, the Internal Revenue Service and the Pension Benefit Guaranty Corporation jointly developed the Form 5500 so employee benefit plans could satisfy annual reporting requirements under Title I and Title IV of ERISA and under the Internal Revenue Code. Form 5500 is widely known to plan sponsors and advisors. The audit report, however, was a hidden and unexpected treasure.

The audit report, a document ranging from 20 to 500 pages in length depending on a plan's complexity, contains all of the design details about a plan-management fees, total assets, asset allocations, vesting schedules, contribution-matching structure, and a raft of additional information.

While discovery of the audit reports was a breakthrough, it was not enough. DOL was unequipped to distribute the information in the audit reports. Data in Form 5500 submitted by plans, Ryan says, were scanned by DOL and optical character recognition transformed that information into a database. The precious data in the audits had languished unused for years.

"The audit reports just sit there," says Ryan. "They [DOL] don't scan them, they don't do anything with them. They just sit there basically as a digital image." Making matters worse, you could get at this detailed plan data only by photocopying each individual audit report, at five cents a page. The information was not electronically available!

DOL's disregard for its precious data was an affront to plan participants, and Ryan and Mike knew that systematically tapping it was critical to BrightScope's success. "Basically, we went to the department and said, 'You've got all this great data. You're not doing anything to process it,'" says Ryan. "'Just give it to us and we'll do all that hard work. We'll do the evaluation on clients, we'll empower people in the marketplace to identify problems and fix them.'"

Getting a federal agency like DOL to change its ways, however ill-conceived, is no easy task. The brothers filed Freedom of Information Act requests and met with key senators to try to pry loose the audit report data in a user-friendly format. It took a year of going back and forth with DOL, but they've largely succeeded. DOL now makes the data available in a digital format that BrightScope-and the public-can consume and analyze more easily.

"It's slightly more accessible, but there is still a tremendous amount of processing to get the information into a database," says Ryan.
The Alfreds take no credit for helping change DOL policy on distributing data on 401(k)s. They say that DOL was already examining ways to make its data on 401(k)s more accessible when they showed up. But the Alfred brothers' timing and persistent focus has borne results. The Alfreds have played a role in the "Googlefication" of DOL data on qualified plans.

"The big change, which is called EFAST2, was already in the works back when we were requesting the data," Ryan says. "The major shift that occurred wasn't a result of our pressure, but certainly their [DOL's] sensitivity to FOIA requests, their ability to respond to FOIA requests of this nature, has improved dramatically because of the volume of data we've requested and our ability to work with them to streamline that process for them."

Since Ryan and Mike went to Washington two and a half years ago, BrightScope has shot to national prominence in a dizzying media blitz. The brothers say they want BrightScope to become "the Morningstar of 401(k)s," and they are off to a great start in achieving that goal. In fact, the stunning rise of BrightScope is like Morningstar all over again.

I remember meeting Don Phillips, now president of Morningstar's Fund Research division, in 1986 for the first time with a couple of other mutual fund analysts in a New York hotel lobby. I was a reporter for The New York Daily News and Phillips was doing a nonstop dog and pony show for the press about Morningstar's research and five-star mutual fund rating system.

Fast forward to my phone call last month with Ryan and Mike; the Alfreds are giving me a tour of BrightScope.com and, like Morningstar 25 years ago, BrightScope is going direct to consumers first. It's the same formula that Morningstar founder Joe Mansueto used in the early 1980s to outmaneuver other mutual fund research companies. As with Morningstar a quarter century ago, winning investors is necessary if BrightScope is to become the data and research service advisors, plan sponsors, and plan consultants must rely upon.

When Morningstar was founded, Lipper Analytical, Weisenberger, and a few other vendors already dominated the mutual fund data and research business. Mansueto, with fund expert Phillips serving as Mr. Outside, popularized the fund research business and made it understandable to investors on Main Street with the five-star rating system.

Similarly, the BrightScope Rating report is free. By offering a free BrightScope Rating report on any plan with more than 100 employees to anyone who visits BrightScope.com, the company is creating awareness of the rating among investors. Just as star ratings became the metric used by investors for mutual funds, a BrightScope Rating could thus become the trusted tester preferred by America's 401(k) plan participants.

Any company can compile the DOL's public data on 401(k)s and create research reports and ratings based on automated or human analytics. Though the Alfreds appear to have been the first to mine data in audit reports, DOL data are public and anyone can access it.
BrightScope's success hinges on its ability to use DOL data to deliver value-added analytical reports on 401(k)'s to investors, sponsors and advisors and build a recognized brand around the quality of its reports. Time to market and brand awareness are crucial. So, just as Phillips became America's favorite mutual fund analyst when Morningstar was founded, the Alfred brothers are on their way to becoming the nation's most quoted experts on 401(k)s.

The "Newsroom" page on BrightScope's Web site documents the media campaign catapulting the company to national prominence. It started at the beginning of January 2009 with coverage by 401(k) trade media like Employee Benefit Adviser and Boston ERISA & Insurance Litigation Blog. By the end of that month, however, U.S. News & World Report had written an item. "Now there's a place where you can dish all the juicy financial details online," said U.S. News reporter Emily Brandon. "BrightScope Inc., an independent data analysis firm, launched the nation's first online 401k rating system today."

In February came a CNNMoney.com story about BrightScope, then a mention of their data in BusinessWeek in March and a post about the company in a July Wall Street Journal blog. Over the next year, USA Today, SmartMoney, Forbes and The New York Times covered the company. Now, the Alfred brothers tell their story or provide 401(k) data to national media outlets several times a week.

Of course, the media are calling for good reason: BrightScope provides data and analysis previously unavailable on 401(k)s.

"The first thing you can do when you come to our Web site is look up a company in the search bar at the top to get what we call its BrightScope Rating Page," says Ryan. Nifty programming in the search bar auto-fills the full name of a company as you begin to type.

"This is where you're going to get an overall review of the quality of a plan based on a ratings system that we've developed," he adds. "It consists of the overall measure of quality, which we call the BrightScope Rating, which is a 1-100 rating. It's designed to measure the ability of this plan to get its participants to retirement, and, obviously, higher scores here are better."

I took a look at a BrightScope Rating Page for a company plan that could be an attractive client for our readers: a $12.4 million plan with 130 employees of a medical group specializing in radiology. The BrightScope Rating measures the ability of a plan to get its average 401(k) participant to retirement and is calculated by running thousands of simulations on the plan.

To compare 401(k) plans, BrightScope constructs a unique peer group for every single plan. To make that plan's design and performance comparisons fair and valuable, BrightScope's peer group algorithm takes into account the number of participants in a plan, the level of assets and the industry of the plan sponsor. In the company plan that I reviewed, the BrightScope peer rankings show that although the plan has a rating six points higher than the average rating of 69 for plans in its peer group, its rating of 75 is eight points below the best plan in its peer group. BrightScope estimates the average participant in this plan will have to work seven years longer than a counterpart participating in the top-ranked plan in the peer group and will lose out on $56,200 of lost retirement savings relative to the other plan's average participant.

The lower half of a BrightScope Rating Page contains additional information of use to all 401(k) stakeholders and those seeking to sell advice to them. One intriguing data item is the "Other Companies In Peer Group" list. Armed with the names of those companies, an advisor could construct proposals that are targeted to specific industries and develop a niche-such as doctors or construction companies.

Until now, only the plan sponsors had enough data to perform proper analysis on a plan. In fact, Ryan says plan participants often-and sponsors sometimes-do not have data about their plan's fees. For instance, there was nothing on the Form 5500 showing what mutual funds a plan used. Since that is the largest component of plan expenses, not knowing this basic information made comparative analysis and benchmarking of plans impossible. New DOL regulations are changing that, along with BrightScope's intelligent use of the data coming available.

BrightScope says its database now consists of 50,000 plans, covering 90% of all the assets in corporate plans. Large plans with $500 million or more are very efficient compared with small plans. Total plan costs vary widely among small plans with $5 million or even $25 million in assets. Many small plans are paying expenses of more than 3%, 4% or even 5%. Those plans represent rich targets for advisors.

"Most smaller plans are looking for a little bit more than low cost," says Ryan. "They want some services, they want advice for participants, they want to have loans made available. You can go in there now using our tools and just prospect all the plans above 3% in fees-the people with the real pain."

Now add in geo-location-the ability to target plans that are paying the highest expenses and that are within a 10-, 20- or 100-mile radius of your office. You can screen for 50 plans with assets of a certain size that have high fees and that are in a 100-mile radius of your ZIP code.
BrightScope creates simple prospecting reports customized with an advisor's logo and a space where an advisor can enter a brief description of his value proposition. Advanced reporting capabilities are also available with more granular data on a plan versus its peers.

Advisors can subscribe to BrightScope for $8,000 a year. That buys unlimited searches of plans and 12 plan reports that can be used for prospecting. But the number of prospecting reports you can create is limited to 12, 36 or 60 a month.

My guess is prices will come down in the years ahead, but BrightScope is the first time market and doing a great job. So advisors who are serious about the qualified plan business will pay its price.

Editor-at-large Andrew Gluck, a veteran financial writer, owns Advisor Products Inc., a marketing technology company serving 1,800 advisory firms.