Savings with a twist.
When the IRS informally sanctioned plans for a new 401(k) credit card earlier this year, the editors at Financial Executive took note. If consumers can now tap this tax-free, long-term savings account for daily expenses, what other unique 401(k) financial instruments and creative features are lurking out there? We put that question before some of the nation's leading plan providers to see what we could find.
Our flash survey garnered a range of responses. We heard from plan providers offering full-service, bundled products complete with multiple investment options, recordkeeping and trust services as well as comprehensive employee education programs. We also heard about customized, stand-alone investment management products and services.
Overall, we found that 401(k) plan designers are getting more creative for two basic reasons: to increase plan participation and to accommodate special situations, like highly compensated employees.
Ohio-based Banc One, for example, seems to be leading the way toward more accessible long-term savings. The bank is the mastermind behind the 401(k) credit card and has "loosened the strings" on previously "untouchable" retirement accounts with a program that makes it very easy for participants to borrow from their own retirement nest egg.
Boston-based Fidelity administers a plan for the Gillette Company that makes special provisions for highly compensated employees. This plan mirrors the company's qualified plan.
But, when we asked the plan providers how many allow nonqualified wraparound arrangements to maximize deferrals of highly compensated employees, it wasn't a shoo-in. Some do, some don't and some go halfway. (In a private letter ruling last year, the Internal Revenue Service okayed the use of these wraparound plans to temporarily hold the contributions of high-paid employees for later transfer to the qualified 401(k) plan. In this way, a company can avoid exceeding the allowable ADP percentage, which may call for burdensome plan adjustments or refunds.)
And for employees who have the urge to take control of their retirement savings strategy, Minnesota-based American Express Institutional Services offers one of the more hands-on 401(k) programs. The company helped design, and currently administers, a plan for Pillsbury that features a "self-directed" option for employees. Through this program, participants add a twist to making their own investment decisions and creating a 401(k) plan that's best suited to their individual risk tolerance and retirement objectives.
While Americans have never been known for their ability to save, this survey convinced us that 401(k) plan designers are doing their best to make it hard not to. Take a look at some of the unique plan features we learned about.
FLAGSTAR CORP. Spartanburg, S.C. $2.6-billion restaurant chain 100,000 employees (Includes two plans: Flagstar's and Denny's)
8,000 employees participate. American Express Institutional Services is plan vendor. Eight investment options: stable value, equity index, small-company equity, conservative blend, moderate blend, aggressive blend, international, company stock. Employer contribution for Flagstar is 25% on first 6% of employee contributions and an additional 75% on first $500 per year of first 6%; for Denny's, 100% on first 3%. Vesting schedule: for Flagstar, 100% immediate vesting; for Denny's, five-year cliff vesting. 100% outsourced. Daily recordkeeping and valuation available. Employee loans available only for Flagstar, with these restrictions: maximum term of 54 months; $1,000 minimum; minimum repayment period is six months; one outstanding loan at a time; no partial prepayments. Company offers separate deferred compensation plan (nonqualified), but it's not a wraparound.
Customization is what makes this plan so unique. Flagstar offers employees at more than 2,500 locations a fully customized video to explain investment options to them. The plan provider also customized several features of the interactive voice-response system to accommodate the employee base.
But the most unique features of this plan are the structure of the investment options, which include three customized vehicles for participants. The first is a custom pool that's designed to be a small-company equity option. It's different because it blends two funds - one proprietary collective fund and one outside mutual fund. The second is a series of custom lifecycle funds, including a conservative, moderate and aggressive blend with eight underlying mutual funds, both proprietary and nonproprietary blended to form the pre-mixed funds. The third is a combined, separately managed stable value fund for both 401(k) plans, with a high amount of synthetic GICs geared at achieving a higher rate of return - for the same amount of risk - than a traditional GIC pool would achieve.
GILLETTE COMPANY Boston, Mass. $6.8-billion razor and small-appliance manufacturer 7,469 eligible employees
95% of eligible employees participate. Fidelity-Boston is plan vendor. Eight investment options: company stock, magellan, growth, balanced, equity index, bonds, money market, fixed (GIC). Considering adding an international option. Employer contribution is 50% on first 10% of savings. Vesting schedule: 100% two years after joining plan or after five years of service. All of plan administration outsourced except controls and design. Daily recordkeeping and valuation available. Employee loans available (lesser of $50,000 or 50% of vested balance). Nonqualified wraparounds allowed.
The company's plan for highly compensated employees is a mirror of the qualified plan. The plan provider maintains the records for this "shadow" plan, and Gillette uses a rabbi trust to safeguard the funds for its employees.
JOHN H. HARLAND COMPANY Decatur, Ga. $561-million checkbook and business forms manufacturer 6,500 employees
6,400 employees participate. American Express Institutional Services is plan vendor. Eight investment options: stable value, S&P 500 index, bond, two balanced, two aggressive growth, international. Employer contribution is 50% on first 6% of employee contributions. Vesting schedule: 1-2 years' employment, 0%; 3+ years, 100%. 100% outsourced. Daily recordkeeping and valuation available. Employee loans available, with these restrictions: maximum term of five years; $1,000 minimum; employer match money not included in loan amount available; one outstanding loan at a time; no partial prepayments. Nonqualified wraparounds allowed.
Until recently the company had two separate plans - profit sharing and a 401(k). The profit-sharing plan had existed for many years and the company was making very rich contributions. The formula for the contributions was based on earnings plus years of service, and many employees had very high balances. The plan was administered entirely inhouse, and the firm made all the investment decisions.
But to make the plan competitive as the company pursued its acquisition strategy, the CFO decided to work with the plan provider to come up with a strategy to combine the two plans and provide participants with the ability to direct their own investments. Particularly unique was the CFO's very active role in consolidating the company benefits, since he felt combining the plans was critical to future company growth as well as employee recruiting and retention. Part of his mission was to educate employees about the changes, upgrade services for the participants, offer new investment options, increase the 401(k) employer match and make the prior profit-sharing contribution a discretionary option for the employer.
PILLSBURY Minneapolis, Minn. $6-billion dough and flour mixes producer 18,000 employees
5,000 active employees participate. American Express Institutional Services is plan vendor. Six investment options: custom mixed stable value, S&P 500 index, growth, aggressive growth, company stock, self-directed. Employer contribution is 100% on first 3% of employee contributions. Vesting schedule: 20% vested per year; 100% after five years. 100% outsourced. Daily recordkeeping and valuation available. Employee loans available, with these restrictions: $1,000 minimum; $7.50 a week or $15.00 biweekly minimum payment; no more than two outstanding loans per employee at a time; no partial prepayments. Company offers separate deferred compensation plan (nonqualified), but it's not a wraparound.
Pillsbury's plan has three primary features that are unique. First, the self-directed investment option allows participants the full range of investing when selecting the mix of investments best suited to their individual risk tolerance and retirement objectives. Second, because Pillsbury's parent company, Grand Metropolitan, is a United Kingdom-based company that's traded on the London exchange, the company stock option presents a special challenge as it's traded in American depository receipts, or ADRs, instead of U.S. shares. Finally, the structure of the managed portfolio for the stable value fund is a unique combination of 40% of the money invested in a federal income fund at market value and the remaining 60% wrapped into a blend of GICs and synthetic GICs.
PROVIDIAN CORP. Louisville, Ky. Insurance carrier 9,000 eligible employees
6,500 participants. Merrill Lynch & Co. is plan vendor. Eleven investment options: stable value, asset-management (five), broker/dealer (three), company stock, equity index. Employer contribution is 50% on non-company stock up to the first 6% contributed on pre-/post-tax basis; 55% match on company stock. Vesting schedule: 0-2 years, 0%; 2 years, 15%; 3 years, 35%; 4 years, 65%; 5 years, 100%. 100% outsourced. Daily recordkeeping and valuation available. Employee loans available, with these restrictions: limited to two loans per year; residential loans not permitted. Nonqualified wraparounds not allowed.
Providian's plan has two unique features. First, it doesn't offer a hardship provision. And, second, on September 1, 1996, the Providian stock investment option became the Providian employee stock ownership plan. As a result, dividends paid on company stock are now treated as a contribution, invested in accordance with the existing investment matrix or paid out in cash. Participants must fill out an election form to select an option.
SOUTHERN COMPANY Atlanta, Ga. Electric power generation facility 25,000 eligible employees
23,600 participants. Merrill Lynch & Co. is plan vendor. Eight investment options: retirement preservation trust, corporate bond fund (investment grade), capital fund, global allocation, equity index, special value, company common stock. Employer contribution is 75% of the first 6% either before or after tax. Vesting schedule: 100% upon enrollment (one year of service required). 100% oursourced. Daily recordkeeping and valuation available. Employee loan available, with these restrictions: repayments not to exceed 20% of participants' base compensation; allow two general-purpose loans and one residential loan. Nonqualified wraparounds not allowed.
The Southern Company's plan includes a mandatory dividend pass-through that allows participants to elect to receive a check or to reinvest the dividend through the company's dividend reinvestment program on a quarterly basis.
RELATED ARTICLE: AND THEN THERE ARE THE CONTROVERSIES ...
Employee retirement plans, especially 401(k)s, are big news right now. In the first two quarters, this stalwart of American retirement savings has come tinder the scrutiny of the U.S. Senate and the Department of Labor, and has sparked some debate among plan consultants and administrators.
For instance, the 401(k) Pension Protection Act of 1996, currently pending in the U.S. Senate, was introduced by Sen. Barbara Boxer (D-Calif) earlier this year and aims to subject 401(k)s to the same 10-percent limit on investing in employer stock that exists for defined-benefit pension plans. In our survey of 401 (k) plan providers, Financial Executive asked respondents if they believed there should be limits on the amount of employer stock in any employee's portfolio.
Most respondents "see no reason to limit the discretion of any employee investor." One explanation: "[Our company] believes that employer stock is an appropriate investment option for some employees. We believe adequate employee investment education is essential in assessing the risk and reward characteristics of employer stock. And we do not believe that regulatory limits are an effective method of addressing the risk of employer stock."
This spring, the Department of Labor issued a bulletin called "Participant Investment Education" that provides guidelines on the type and extent of investment information employers can provide employees regarding 401(k) retirement plans. These guidelines attempt to clear up any trouble employers may have distinguishing between "investment information" and "investment advice." We asked if this recent ruling changed any of the plans already being provided.
One respondent admits that, as a result of the guidelines, his firm expanded the amount of telephone and face-to-face disclosure about investment option characteristics. Another says her company now puts more emphasis on education and the quality of the information it provides.
Financial Executive also asked respondents if employees should pay for their 401(k) plan's administrative costs through higher investment management fees - a hot topic among plan consultants and administrators.
One respondent safely summed up the general feeling of the plan providers surveyed: "We believe that only fees that are reasonable in amount may be deducted from plan funds. Fees that are excessive, unwarranted or unrelated to any services rendered as a fiduciary may not be deducted. It's up to the plan fiduciary to determine what's reasonable." He offers this rule of thumb: "If the expense in question is in the best interest of the participants or beneficiaries, or is necessary to administer a qualified plan, it may be deducted from plan funds. All other plan-related expenses should not be deducted."
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|Title Annotation:||includes related article on employee retirement plans; 401-k plans|
|Date:||Sep 1, 1996|
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