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A quantum leap for Alcoa's 401(k).

Keep it simple, says Alcoa, which used technology to consolidate its 401(k) plans without losing flexibility for its subsidiaries.

Not long ago, Alcoa transformed its 401(k) into a "mega-plan" that would deliver world-class services and save the company money. The concept began to shape up about two years ago, when Alcoa was restructuring. It became a decentralized company, with 22 businesses reporting directly to the chairman. The benefits department couldn't afford to sit on the sidelines as this major initiative unfolded across the organization. It needed to contribute some quantum-leap improvements of its own.

At the time, Alcoa was juggling seven 401(k) plans. The largest in assets covered about 9,000 salaried employees, offered a modest array of investment choices and provided service-related matching contributions. While competitive, the service-related match discouraged some employees from saving early in their careers.

Some of our other businesses and subsidiaries had their own 401(k)s. One unmatched plan covered about 15,000 hourly employees and offered only one investment vehicle. Subsidiaries offered plans with year-end discretionary matching contributions and a variety of other arrangements. In addition, Alcoa offered key employees a nonqualified plan designed to mirror the 401(k).

To complicate things at both the corporate level and the operating units, each plan had its own stable of providers -- recordkeepers, investment managers, trustees and so forth. Also, each plan required separate forms, processes and procedures for routine activities. Employees had to endure paperwork delays, even if enrolled in plans with relatively limited fund diversity. For instance, they had to submit forms by the 20th of the month to effect fund transfers at month's end. In short, the plans required a lot of support just when we were streamlining and trying to bolster the effectiveness of the human resources function.


The vision underlying the mega-plan concept was consolidation, but that wasn't the only goal. We wanted to use the latest technology to manage smarter -- not just faster -- than before. Translation: a high-powered umbrella plan with all the bells and whistles for our employees, but efficient enough to be affordable for even the smallest subsidiary. Today, our subsidiaries can adopt the standard qualified plan and the nonqualified plan, although the nonqualified plan documents are often tailored to subsidiaries' needs. As an incentive, our new 401(k) includes a package of leading-edge services that each subsidiary probably couldn't support on its own.

With the help of a consulting firm, Alcoa began building its ideal system with a straightforward plan design, encompassing many characteristics TABULAR DATA OMITTED attractive to any business unit. We started with common features like 401(k) contributions, a company match, loans and hardship withdrawals. Then we added some financial flexibility for businesses, such as varying levels of employer contributions. To administer the plan economically, we standardized administrative procedures in areas like vesting, the amount of pretax and total savings, and loan, withdrawal and transfer provisions, to make them work in a daily-valuation environment.

Next, we chose an all-or-nothing adoption policy. That means subsidiaries must adopt all of the plan provisions and administrative procedures or none at all, except for the company match rate, any grandfathered vesting and payouts from existing plans. This preserves the ideal administrative environment and ensures that our business units benefit from the savings.

In designing the savings plan, we recognized that our units need to tailor the plan to their own objectives. While all other plan provisions are identical from unit to unit, the unit's contribution may vary to reflect differences in competitive markets or financial strength. The type of contributions can include:

* Discretionary year-end contributions;

* Traditional company matches, such as $.20, $.43, $.62, $.87 or $1 per $1 of employee contributions, up to 6 percent of pretax pay; or

* Some combination of these types, such as a lower-fixed match with a discretionary year-end match based on performance.


All participants use our InfoLine voice response system and telephone service center, which reinforces our design. Voice-response technology enhances participant-inquiry and transaction capabilities. Live telephone service-center support, which we outsource, expands service for all transactions or inquiries, particularly the more complex situations. Additional services include:

* Daily valuation of participant account balances.

* Weekly loan, withdrawal and distribution processing, with valuation on the request or approval date.

* Touch-screen interactive software, which not only offers transaction capabilities but modeling of investment choices or total retirement income from all corporate sources -- savings, pension and deferred compensation. All the technology features in the savings plan also are available to executives for their deferred-compensation plans.

Each participant follows the same set of rules, hears the same information and gets the same service. And, regardless of business unit or location, the plan is administered and coordinated under a single system. This approach allows us to virtually eliminate administrative problems historically caused by different procedures, provisions and systems, and to focus instead on providing a leading-edge design at the lowest cost possible.

All plan participants at each unit now have six investment options, including company stock. Four of the choices are mutual funds, while the fifth is a stable investment fund. Some of our objectives in choosing these options are to encourage long-term capital accumulation and investment diversification and to make administration easy. The charts on page 20 show the investment options and the allocation of employee contributions among them.


The savings plan (Alcoa's qualified 401(k) plan) and the deferred-compensation plan (Alcoa's nonqualified plan) are designed to complement and mirror each other. To date, 25,000 of 35,000 eligible employees are covered under the new savings plan. Both plans provide the same investment, savings and transfer options, and both include the company's offer to match up to 6 percent of these pretax deferrals, although employees can receive a match in only one plan.

But the plans are somewhat different. As a nonqualified plan, the deferred-compensation plan carries a risk of forfeiture (the balances aren't guaranteed). Employees eligible for both plans can defer up to 6 percent of their eligible compensation into the savings plan, but they can defer up to 20 percent to the deferred-compensation plan. Or they can allocate up to 20 percent between the two plans. The savings plan is open to a broad range of participants, while the deferred-compensation plan is only for employees in specific job grades. And the deferred-compensation plan, unlike the savings plan, allows participants to defer part of their short-term incentive payouts into the plan.

Participants in the deferred-compensation plan may access their balances only when they retire or otherwise leave the company. Under certain conditions, the deferred-compensation plan allows participants to receive their balances in installment payments instead of a lump sum. The savings-plan payouts feature the tax advantages available to qualified-plan payments, such as rollovers, lump-sum treatment and a nontaxable basis. Deferred-compensation-plan payouts are taxable as normal wages.

The deferred-compensation plan has the most flexibility for participants trying to manage their total compensation. The added flexibility is also intended to help participants meet retirement objectives that they'd miss otherwise because of legislated limits on the qualified plan.

One important similarity is that participants in both the savings plan and the nonqualified deferred-compensation plan can use the same delivery tools. Alcoa's voice-response system has information on both plans, so that participants can hear their account balances and make investment decisions. Our telephone service-center representatives are trained to help participants with both programs. The newest release of our interactive software will let participants look at the two plans, get their account balances, initiate transactions and create retirement models with their own information and assumptions.


Technology makes the entire plan concept viable. The technological links enabled us to streamline our entire administrative process. Our plan is not only more efficient, but it offers participants more and better services, including faster turnaround.

We also wanted to reduce our paper use where possible. Our first goal was eliminating the forms that used to be necessary to start any activity, and we were successful.

To illustrate, let's look at the enrollment process for new participants. First, our human resources system informs the consulting firm of newly eligible employees through a weekly computer-to-computer feed. The firm sends an enrollment kit to these employees, including a personal identification number and instructions on how to use InfoLine, Alcoa's voice-response and telephone-service center. Also included is information on the employees' investment choices and the plan provisions. If the employee is eligible for the deferred-compensation plan, he or she also gets information on that plan.

Using voice-response technology, employees interested in participating provide their Social Security number and personal identification number. Once they've cleared security access, a series of menus prompts them to elect their deferral rates and future investment choices for one or both plans. The employee can request an InfoLine live telephone representative at any time during the conversation.

Once employees complete the process, they receive a statement confirming their elections and stating that the new payroll-deduction percentage has been sent to the appropriate Alcoa payroll system. Payroll generally applies the new deduction to a participant's pay in the next eligible payroll period. These instructions are sent electronically through a file transfer every week.

At the end of this process, payroll updates its files and provides the consulting firm with the deductions for each payroll period until the participant does something to interrupt the process, such as terminating or suspending the plan or requesting a loan. Fund transactions are communicated electronically to our trustee and our fund managers, and money is wired to the appropriate investment.


We also handle fund transfers without forms. Participants can transfer their balances between the six investment options on any business day once monthly. To begin the transfer, participants must call before 4:00 p.m. Eastern time. InfoLine, through either the voice-response system or the telephone service center, allows the participant to specify how much to transfer from each fund and how to reallocate the balance among the remaining funds.

If the call comes in before 4:00, the fund is valued at the close of business for that day. If the person calls after that, the fund is valued at the close of business for the next business day.

The system captures the request overnight and waits for the nightly pricing feeds from our trustee and our investment managers. If the participant calls again after the transaction has been entered and prior to its valuation, he or she will hear a message saying the event is in progress.

Once prices come in, the transactions are updated and information is automatically generated and fed to the trust and the investment managers that same evening, instructing them to move balances between the investment funds. These trades are confirmed through linkages the next morning. Confirmation is made first between the consulting firm, the trustee and the investment managers, and then it is mailed to the participant. When the participant calls the following day, the account balance has been updated to reflect the prior night's activity.

These procedures have vastly simplified administration and record-keeping for our 401(k) plan. Even more important, they make the plan a better value for our employees, while keeping the goals of each Alcoa subsidiary intact. Technology has helped our plan leapfrog into the 21st century.

Mr. Heckathorn is manager of qualified plans at the Aluminum Company of America in Pittsburgh.
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Title Annotation:Employee Benefits; Aluminum Company of America's employee benefits
Author:Heckathorn, Larry
Publication:Financial Executive
Date:Sep 1, 1993
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