Should you bundle 401k services?
Defined contribution plans are becoming increasingly prevalent, especially the 401K plans within the private pension marketplace. And, in fact, the total funds invested in private 401K plans has increased from $110 billion to $250 billion in the last five years. But with the increasing popularity of these plans, employers are challenged to provide plan service efficiently and with minimum cost and administrative burden. They also must be concerned about compliance with the Department of Labor's 404(c) regulations, which requie, in essence, that such plans offer participants a minimum of three diversified investment options, and that they allow participants to transfer in and out of their investment options at least once a quarter. Bundling all the 401K services with a single provider enables companies to accomplish all of these objectives. Even though Sprint's 401K plan was in conformance with the 404(c) regulations, we recently decided to bundle the service because we learned that such an approach would enable us to provide the most cost-effective and efficient services to plan participants.
Sprint, like many companies, especially those in high-tech industries, has undergone significant changes as the industry has changed and as the company's core businesses have expanded. As the company has grown, so has the number of people it employs--and so has the need to provide services to those employees. One of the challenges to Sprint has been to direct an employee benefit plan that attracts and holds the kind of employees who will contribute to the company's future growth, and to provide those plans at the most efficient cost to the company and its shareholders.
Until early 1992, Sprint was known as United Telecommunications, Inc. The company's principal business was providing local telephone service. But in the 1980s, United Telecom expanded into long distance. In 1986, United Telecom and GTE merged their long-distance businesses to form a 50/50 partnership, called US Sprint. United Telecom proceeded to buy out the GTE interests in 1988, first acquiring an additional 30.1 percent to assume controlling interest, with an agreement to complete the buyout of remaining interest from GTE. When United Telecom completed the buyout in early 1992, the company changed its name to Sprint Corporation.
Before 1990, the company had two 401K savings plans for non-bargaining unit employees, one for United Telecom employees and the other for the employees in the long-distance partnership still owned by US Sprint and GTE. But after United Telecom purchased an additional 30.1 percent of US Sprint from GTE in 1990, management decided to merge the two plans and to add two new investment options. So, as of January 1990, plan participants had five investment options (growth stock fund, value stock fund, guaranteed income fund, intermediate bond fund, and company stock fund).
The merger of the plans, which was very difficult, took us most of 1990. We had to merge records for roughly 30,000 participants involving $400 million. But it provided us with many valuable lessons that we put to good use a year later, when we bundled the 401K services. The steps that ultimately led to bundling 401K services began in 1991, when we decided to invite competitive bids for the trusteeship of our 401K program. At the time, we had several providers for our 401K plan: a bank as trustee; an actuarial company that served both as recordkeeper and as provider of communications service; and three outside investment managers, one of whom handled the plan's equity options. As we began the solicitation process, one of our objectives was to learn more about bundled services and how well such a program would meet our needs.
In going out for bids, we had three objectives:
* To enhance the level of services to participants,
* To improve process efficiency and information flow to the company, and
* To reduce our costs.
We began by inviting bids from trustee institutions, some of which could handle both trustee-ship and recordkeeping, and from providers of bundled services. Representatives of the Sprint treasury and human resources staffs interviewed each of the candidates. We visited their offices and explored the full array of services they offered, as well as the quality of those services they could provide our participants. As we went through this process, it become increasingly clear that a bundled service approach offered significant benefits both to the company and to plan participants. So we moved our 401K plan to a bundled services provider, and both the company and plan participants are now reaping the benefits of that decision.
WHY BUNDLED SERVICES?
From the company's perspective, the bundled services approach provides significant cost savings and improved administrative efficiency. The bundled services provider also offers an array of communications services and a cost-free IRA roll-over for both retirees and terminating employees.
From the participants' perspective, the bundled services approach not only improves service quality but has the potential to offer plan participants a greater breadth of investment options.
But we decided on bundled services primarily for four benefits it provides: the daily valuation provided to participants, the lower costs to the company, the faster reporting, and the reduced administrative burden.
We made our final selection based on the following considerations:
* The proven record of providing high-quality services, including trusteeship, accurate and timely recordkeeping, proven investment management results over time, and strong communications support.
* Availability of state-of-the-art systems and well-trained service people. (The bidder we selected has telephone service representatives who are dedicated to Sprint's 401K program, are well trained and well educated, and are knowledgeable about 401K plans in general.)
* An equitable fee arrangement for the company and the participants.
* Timely reporting to participants and the company.
* A Sprint 800 number dedicated to the participants--our customers--to enhance service.
* Capability to provide separate management for an interest income fund that had been formerly a guarenteed income fund invested exclusively in GICs and BICs.
MANAGING THE CHANGE
Once the competitive bidding process was completed, we received approval to proceed from our in-house investment trusts committee, our external pension and savings trusts committee, and our board of directors.
Then we had to make the change become a reality.
The first transition step was to form an in-house interdepartmental task force to manage the transition from the five outside provides to a single bundled services provider and to complete the task with minimum disruption on a timely basis. We began working on the transition in the fall of 1991 and completed it about nine months later, in June of this year.
Our prevoius experience in merging the 401K savings plans at the end of 1990 taught us the importance of employee communications. The quality of our communications effort would make a critical difference in a successful transition and could win even stronger employee participation in the plan.
In January 1992, participants were sent a letter advising them of the planned changes to the savings plan and the conversion timeframe. This first communication was especially sensitive because, to ensure a smooth transfer of participant records from one recordkeeper to the next, we blocked out several months during which the participants could not make changes.
The second communication--a comprehensive communication package--was sent to employees in May. The package included:
* A comprehensive statement of the benefits of the saving plan and the value of the enhancements offered under the bundled approach.
* Discussion of the importance of asset allocation.
* Discussion of the benefits of diversification.
* Description of the risk and return characteristics of the investment options, particularly the interest income fund (formerly the guaranteed income fund).
During this time the company's daily newsletter (a Sprint broadcast FAX to locations around the country) included brief articles on various aspects of the new bundled services approach.
We were up and running with our new bundled services provider by the end of June. Our final communication, sent to employees at this time, was a special telephone card that provided a handy, quick summary of facts and how-to information that employees can use to call for current information about their investments or to make changes in investment elections.
During the transition period, we also had to coordinate the delivery of employee data from 12 different payroll systems to the bundled service provider (Sprint has 43,000 employees around the world). To accomplish this, a representative of information service served on the task force; his responsibility was to coordinate with the bundled services provider to make certain our payroll systems interfaced with their systems and to draw up the specifications for necessary modifications to our systems. The IS representative also worked closely with the human resources staffs in Sprint's field locations to make necessary modifications.
There were a few bumps in the road, although in total the transition went quite well. The transition team relied on a comprehensive PERT chart to manage the conversion, and, most importantly, we provided sufficient lead time. As a result of this effort, participants received their statements for the second quarter of 1992 from the new bundled services provider as promised.
ADVANTAGES OF THE BUNDLED SERVICES APPROACH
Our participants today enjoy much better services and have a very competitive, high-quality savings program available to them. Here are the advantages of the bundled approach over our previous program:
* Daily valuation of accounts. (Previously, valuations were performed monthly.)
* Daily transfer and reinvestment of existing account balances. (Previously, transfers were available once every three months.)
* Daily redirection of current contributions into a new fund. (Earlier, contributions could be redirected monthly.)
* Statements are issued by the 20th calendar day of the following month. (Previously, statements were provided approximately 45 calendar days following the end of the month.)
* A toll-free Sprint 800 number provides access to participant account information. (Previously, participants' account information was provided by statements or Sprint human resources representatives.)
* Telephone processing of participant loans. (Previously, participant loans were processed by Sprint's human resources representatives.)
* Timely pay-outs and loans to participants. (Before bundling, payouts and loans were processed monthly, but delivery of funds was deferred cotingent upon the recordkeeper's schedule.)
* Roll-over of accounts at retirement into the provider's IRA at no cost. (Previously, retirees incurred these fees.)
From the company's perspective, as well, there are specific advantages:
* Sprint has a decrease in overall fees in excess of $1,000,000 annually.
* Reduced administrative burden both for the treasury and human resources staffs.
DISADVANTAGES OF THE BUNDLED SERVICES APPROACH
As with any approach, there are minuses as well as pluses. By having all our 401K plan services consolidated at a single provider, we lose some flexibility if it should become desirable to change one segment of our services in the future. Should we elect to change providers in the furture, we probably would consider moving only to another bundled services provider or one of the comparable approaches now being developed.
Our move to a bundled services provider for our savings plan has been an enormous success in terms of reduced overhead costs and enhanced quality of services to participants.
The feedback from plan participants has been very positive. The employee communications have helped increase employee understanding and, we believe, will help to increase participation over time.
Today, our savings plan offers five investment options (many companies offer fewer) and we will soon add a sixth -- an international stock fund. The bundled approach makes it possible for us to provide participants a number of investment options without increasing our administrative burden.
As we look back on the past year, we are very pleased with our decision to change the way we manage our employee savings program. The move to a bundled services provider, and the significant improvements we have realized as a result, will benefit both the company and its employees in the years ahead.
[Mr. Strandjord is senior vice president and treasurer of Sprint Corporation, Westwood, Kansas.]
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|Title Annotation:||Employee Benefits|
|Author:||Strandjord, M. Jeannine|
|Date:||Sep 1, 1992|
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