TRW's 401(k) grows up.

When TRW decided to revise its stock savings plan, it aimed to cut costs and improve service. Find out how the right information technology helped it do both.

In a way, 401(k) plans are like infants. Everyone adores them and remarks about how they've grown. But few people consider that you have to continually watch them, as well as change them. In the last 15 years, we converted or changed our stock savings plan 12 times. Our biggest challenge arrived in the winter of 1992, when we had to revamp the plan to comply with the Department of Labor (DOL) requirements to implement 404(c) regulations. Along the way, we discovered another good reason for improving the plan: new information management technology that could address the needs of both the company and the plan participants.

TRW's concerns ranged over several different areas. For example, because of employee attrition, human resources spent a great deal of time communicating with both current and former employees about the plan, and it needed to streamline those efforts. Human resources also wanted to consolidate responsibilities under a central group so that it could free its field representatives from 401(k) duties.

And both finance and human resources were concerned about the large amount of paper we were using. Processing and storage were becoming big problems. The job of printing computer reports seemed endless, and the run time on many jobs was considerable, even with a powerful computer mainframe. Programming requests prompted by frequent regulatory changes added to the cumbersome processing workload. On top of all that, our investment department believed that we needed more diversity in dispensing assets. Our legal department agreed, although it focused more on the issue of investment advice. Therefore, to meet our requirements, the new plan would have to eliminate paper, cut staff in the stock savings plan office and in the field and reduce computer processing costs.

The 36,000 participants in our plan had a separate wish list. In order to make informed decisions and implement them quickly, they wanted better access to information, including more timely quarterly reports and historical data. They were also concerned about fund transfers, disbursements and loans. These were particularly important considerations for participants with larger dollar amounts, because as fund balances grow, they begin to doubt their own ability to manage their portfolios and start looking for guidance in making investment and diversification decisions.

After we settled on our needs, we began searching for vendors, a process that took about eight months. We spent much of this time listening to proposals and eventually on making on-site visits. As we visited vendors we continually asked them about their ability to automate various elements of the plan. Our only real problem was agreeing on the final choices. This required hiring a third party to help us focus on our evaluation process. For us, the most important consideration, aside from quality, was the ability to work effectively with the vendor we selected. We wanted our staff members to feel comfortable with the style, performance and work ethic of their new partner.

Another important goal in improving our 401 (k) was streamlining the flow of information and providing better service through good information management. But that didn't always mean scrapping our old methods. For instance, we'd always required employees to work for us one year before they became eligible to join the stock savings plan. When we began to look at changing the plan, we initially thought allowing them to enroll as soon as they were hired would be a big improvement. But after studying the data flow of employee information from the field to our office and to our recordkeeper, we all but abandoned this idea. Given the turnover rate for new employees, the cost of adding them to the plan and then paying them a short time later wasn't worth the effort.

On the other hand, adding more funds to the plan was a foregone conclusion, and the ability to electronically transfer investment information allowed us to choose virtually any investment house. We still ended up using our trustee's common trust funds, but at least we know that technology won't hamper any future decisions to enlarge our investment choices.

In the past, we limited contributions to individual funds to increments of 25 percent. To allow participants to diversify their assets, we changed the increments to 10 percent and let them make changes twice a month instead of once. No one makes two changes a month, but this cuts in half the amount of time it takes payroll to process the information, and participants like that. We did the same thing to fund transfers.

To add more flexibility, we gave participants the ability to "reallocate" their fund assets. By using this approach, they can periodically realign their portfolios to keep the asset percentages at pre-established levels. In retrospect, we should have taken these changes one step further by going to 1-percent increments. We could easily have handled that from the administrative side, and participants wouldn't have the problem of converting the amount they want in each fund to the nearest 10-percent increment and then making it total 100 percent.

We also changed the way we paid our disbursements, which include in-service, after-tax withdrawals and lump-sum distributions. Since participants liked our semimonthly loan processing, it made sense to set all disbursements to the same cycle, so we now pay every 15 days instead of once a month. In making the switch, we had to get our field representatives up to speed to accommodate the faster turnaround time.

DECIDING TO RECYCLE 

One of the biggest decisions we had to make was whether to shift the plan's recordkeeping to a daily cycle. Before we revamped the plan, we used an internal recordkeeping system that operated on a monthly cycle and received data on participants at 85 payroll locations, which was processed by 12 data centers. While our payrolls ran on different pay cycles, their contributions and loan payments were all due on the second business day of the following month.

In researching our options, we found that while everybody talked about daily processing, to our knowledge only a few companies had committed to it. Most people who talked about daily processing really meant weekly. Others processed contributions monthly but ran their disbursements weekly. We noticed that companies changed to a shorter processing cycle only for the area in which they had the biggest problems. In other words, if a company were concerned about the delays in processing lump-sum distributions, then that was the area that got the one-week processing cycle.

We found that mutual fund companies could handle daily processing. Unfortunately, few of them were experienced in transferring that expertise to 401 (k) plans. They were unaccustomed to gathering data from 12 different payroll sites, reconciling contribution balances, monitoring maximum dollar limits, checking loan payments and verifying employment status Those that did have experience dealt with smaller, less complex plans.

Today, the same search would probably turn up many new contenders with well-designed programs. At the time, however, we found ourselves with experts who could do half the job well. The mutual fund group was skilled at daily processing, while other vendors were experts at maintaining 401 (k) records. By establishing a daily processing network, we were able to integrate their skills.

Once we finished our on-site reviews of potential vendors, our committee was ready to list the requirements for daily administration. At this point, we still weren't sure that we should use an unbundled approach to our 401 (k) plan, which would take the best vendor in each discipline and bring together their expertise under one umbrella. Our dilemma was determining if any one vendor had the capabilities to do everything we needed. We asked ourselves if we could give up a touch of quality to cut down on the complexity of new communications technology.

MAKING THE RIGHT CONNECTIONS

In the end, we chose an unbundled approach that included a guaranteed investment contract (GIC) manager, a trustee/investment manager, a recordkeeper and the stock savings plan office. Each office would be required to interface daily. Once our daily processing cycle for employee contributions was in place, the payroll departments in various locations would feed the recordkeeper information by pay period and process all other transactions semimonthly.

We hired an outside vendor to handle recordkeeping. Initially, this eliminated the cost of in-house programmers to convert to a new daily processing system. It also subtracted the cost of reprogramming that we would have incurred to meet governmental regulations for disbursements that were imposed on all 401 (k) plans in 1993. To make the transition easier, we transferred from the stock savings plan office to our new recordkeeping system in two stages. First, we moved the data base to the recordkeeper on August 1, 1992. On January 4, 1993, we went live with our daily processing.

From the administrative standpoint, the only real change in players was between the stock savings plan office and our recordkeeper. The recordkeeper works closely with this office and maintains all the accounts, receives payroll data and processes all disbursements. Other duties include preparing and mailing 1099s, preparing quarterly statements, performing various government testing requirements and updating participant accounts daily. But we've chosen to leave some recordkeeping responsibilities with the stock savings plan office. For example, it maintains the general ledger and prepares the financials for the external auditors' sign-off, and it also has overall responsibility for daily plan administration and for implementing all plan design changes.

Before we made our plan changes, our trustee was already managing our equity fund, which seeks long-term capital growth by tracking the overall performance of the Standard & Poor's 500. Because the plan participants understood this fund well, we decided to add the bond index fund, which tries to replicate the Lehman Brothers Government/Corporate Index, and the small-company equity fund, which follows the Russell 2500 Equity Index, to diversify the plan. This approach offers the participants a high-quality investment at low cost, and since they understand the concept behind the funds, we find that communicating with them about fund performance is much easier.

Although our trustee had the technology to gather data on funds invested by other investment managers, we thought it best to provide these indices to create a closely knit family of funds. In fact, the trustee now interacts with our GIC manager daily. Our insured-return fund is a stable-value portfolio, but the manager must continually update the daily interest on more than 45 different issues, taking into consideration daily contributions and periodic distributions to plan participants.

Here's how our daily processing works for our funds. The trustee is responsible for calculating the net asset value. Every morning, the trustee receives information on purchases and sales from the recordkeeper and stock savings plan office, which it then processes. Once the market closes and the trustee determines the index-fund valuations, it feeds this information into the system that calculates the net asset value. The trustee transmits the result to the recordkeeper during the early evening hours. On the morning of the next day, the stock savings plan office verifies this net asset value with the trustee. Once all figures are reconciled, contribution and disbursement information is gathered from the trade report. The office then gives the trustee instructions and wires it the necessary funds.

These improvements have helped streamline our plan administration, but we also instituted several service improvements for our participants. For example, to deliver more timely information, we introduced a voice response system. It's linked directly to the data base and, therefore, allows participants to access account information, do loan modeling, and initiate transactions. The participants make their initial calls to an 800 number that our recordkeeper maintains, but they can opt out of the voice response system at any time during the call to speak to a personal service representative. This gives individuals with rotary telephones access and lets everyone obtain non-programmed information.

LONG-DISTANCE SERVICE

The representatives are available from 8 a.m. to 6 p.m. Central Standard Time and work out of an office at an off-site facility that our trustee set up. When the caller transfers to a service representative, a computer screen displays the caller's account. The representative can activate various screens, answer inquiries or effect transactions. The caller can't even tell that this link is with another office hundreds of miles away.

We also added the ability to initiate transactions by telephone. In fact, other than joining or requesting a payout from the plan, participants must handle all transactions by telephone. All participant requests are tied to a recordkeeping network, which can transmit information requests to the service representative group, processing tasks to the stock savings plan office, disbursement data files to the plan's checking account and payroll changes to the various payroll locations. The network also sends daily trade reports to the trustee.

Although we haven't done a formal customer satisfaction survey, we think our plan participants give us good marks for the improvements, based on feedback from human resources and payroll representatives in the field, as well as our participant service center. But we have done some fine-tuning in response to their feedback. For example, we added a new feature to the voice-response system that gives monthly and moving 12-month investment results.

Because participants wanted quicker access to their account balances, we now provide the current day's market values by 8:00 p.m. CST on the voice response system. We also cut our cycle time in half to execute transactions faster. In the loan area, we used to ship "loan packages" to our field representatives, and they in turn had to contact the participants. Now we mail the loan checks directly to our customers within one day.

We've also met a number of corporate goals for the plan. We've eliminated paper transactions, except when participants join the plan or request a disbursement. Of course, our daily costs have gone up since we converted to daily processing. But, we've transferred the work load of our human resources representatives in more than 80 payroll locations to our four service representatives and the voice response system, and that's allowed us to cut the staff in the stock savings plan office by 33 percent. Now that our information management system is on line, we're ready to take on the next generation of plan enhancements.

Mr. Steigerwald is the stock savings plan manager at TRW Inc. in Cleveland.