Your 401(k), your way.
Not too long ago, 401(k) plan administration was solely the province of the human resources department. Then along came 404(c), retirement communication, retirement planning and a host of other issues. Today, you may find yourself, as a financial professional, increasingly involved in administering your company's 401(k) plan.
But managing the plan properly is really no different from managing any other product you sell, except that in this case, your customers are your employees. At Bausch & Lomb, this philosophy guides all our 401(k) decisions. As with any product, you must assess why you have a demand and how much demand you have, what your customers expect, how much your product costs to produce and whether you or someone else can more effectively produce, market and sell it. Once you understand the 401(k) from this perspective, you'll be able to provide the financial leadership to guide your company in delivering a cost-effective plan.
The first thing you need to do is determine why your company has a 401(k) plan. That sounds simple, but it really isn't. For instance, does your company have a defined-benefit pension plan? If so, what kind of benefit-replacement ratio does it provide? Is that ratio sufficient? How does your company define a sufficient replacement ratio? In defining a benefit level, ask if your company looks solely at competitive employer plans or if it establishes some expected standard of living for your retirees. Who does your company believe is responsible for providing retirement funds: employer, employee or both?
Answering these questions will give you a good idea of the role of a 401(k) plan in your company. In some instances, you may not need or want a 401(k) . For example, at some companies, management believes employers are primarily responsible for providing their employees with a pension plan. In others, management may want the 401(k) to eventually replace the defined-benefit plan.
WHAT ARE YOU SHOOTING FOR?
Once you're comfortable with the role of the plan in your company, you should address goals and objectives. Having a 401(k) strongly suggests to employees that management has decided to shift some responsibility for providing retirement funds from the company to the employee. The degree of the shift will greatly influence the design of the 401(k) and its investments. If no pension plan exists or if management has terminated the current pension plan, you're really telling employees the 401(k) plan is the retirement fund.
In all likelihood, if your company is like B&L, the 401 (k) is a major piece of the company retirement plan. If so, the plan functions as a savings or investment plan. This sends a message to employees that both they and the company are responsible for providing for retirement. This undoubtedly influences the investments you offer, and those investments will probably be somewhat different than if the 401(k) plan were the retirement fund. For example, some executives believe that as a savings or investment plan, a 401(k) plan can offer riskier (and potentially higher-yielding) investments than it can as a retirement plan.
Now that you know what to expect from the 401(k) plan, the next question is what your employees expect from it. If you don't really know, you should survey them to find out. Do they perceive it the same way management does, whether as a pension-plan replacement, a pension-plan alternative, a pension-plan supplement or a savings vehicle? If management and employees have different expectations, then the plan won't meet anyone's needs.
Employee expectations will determine the kinds of investments you should consider offering as alternatives. Guaranteed-investment contracts or their relatives are still the dominant investment vehicle in many companies. What does that say about employee attitudes? It might mean employees consider their 401 (k) plan to be a savings vehicle -- an alternative to the passbook-savings account in their bank or credit union. Or it could mean employees are essentially risk-averse when it comes to their own money, or that they need more education about saving and investment markets. You and your management need to determine what employees' investment expectations are telling you. Our employees told us to offer more investments, particularly alternative funds that were "riskier" than the two equity-investment funds we were offering. In response to their requests, we added two equity funds with slightly higher risk this year.
At this point, you've got a pretty good idea of what the 401 (k) plan means to management and to your employees, so the next step is addressing how you can deliver a product that meets the expectations of both groups. The key ingredients are communication, frequency of valuation, investment-fund decisions and distributions. Intertwined in all of these areas is how much technology your company decides to use.
Communication materials provide information and describe the plan and its benefits. Management's decision on which information is to be disseminated influences communications, but hopefully you deliver what your employees expect to receive. How you communicate is extremely important. Your company history and culture can help you determine which form of communication is right for you, whether written or electronic (video, personal-computer disks, CD ROM).
The 404(c) rules have had a tremendous impact in this area, and your company needs to decide what to do. Simply saying you intend to comply is one thing. How that translates into action is something else entirely. Some companies are comfortable providing the bare minimum needed to comply. Others take a more aggressive approach, such as providing retirement-planning lunch-box seminars or computer-simulation modeling of 401 (k) plans. Does your company want to make financial planning available, or does it want to give retirement and investment advice? Yes, those are key questions!
At B&L, we've been wrestling with these questions, too. Seeking answers, we did a survey of 205 companies to determine what kinds of solutions other companies were coming up with. Interest in the communications area is high -- many of the respondents asked for the spreadsheet summarizing the responses, which indicated to us that a lot of other companies are also trying to figure out what they want to do. Presently, we're forming a multidisciplinary task force to determine the direction, emphasis and form of communication that's best for Bausch & Lomb.
TIME IS MONEY
In addition to communications, you should also examine several other administrative issues closely. For example, determining how frequently you'll value your 401 (k) plan is a crucial decision. Today, 401(k) plans can be valued annually, quarterly, monthly, bimonthly, biweekly, weekly or daily. The frequency of valuations will determine the answers to all your other questions on how often and how long you should do certain things. If the plan is valued monthly, you have four to five weeks of "dead time" during which nothing can be done (for example, a loan distribution has to wait that four or five weeks). If you value the plan more frequently, then that dead time is shorter.
At Bausch & Lomb, we found the six- to eight-week turnaround time for distributions was no longer acceptable to employees. We tightened everything we could at the front and back ends of the monthly valuation and reduced the turn-around time to four to six weeks. That was as fast as we could make it and still use monthly valuations. When four to six weeks was no longer satisfactory, we changed to daily valuations.
If you're considering more frequent valuation, think through the consequences for your company. Daily valuations means fund balances are valued every day, contributions are invested as soon as they're made and transactions can take place more often. The key question is: How often? A true daily environment means employees can do anything they want daily, including taking out loans, changing investment selections and altering contribution rates. That's the pinnacle of turning over the responsibility for retirement planning to employees.
After considering several issues, we decided to allow our participants to apply for loans daily, but we only distribute them weekly. Similarly, we let them change their investment allocation on any day they choose, but they can't make another investment-allocation change for another 30 days. However, that may not be the right decision for every company. Some companies may think employees need more limitations and may not want to allow transactions to happen daily.
You should ask yourself a whole series of questions on investment-fund administration. How often will you permit employees to increase or decrease contributions? Can they stop contributing and start again later? When employees change investment allocations, does that automatically change future-contribution allocations, or are these two separate decisions and elections? How often can employees change investment allocations? Should you have waiting periods between changes to investment allocations? How will employees make these elections: on paper, electronically or telephonically?
Distributions are another important part of any 401 (k) plan. Decide how often to make the distributions, who will cut the checks and what you'll send out with the checks. If you process distributions electronically or telephonically, will you still require employee signatures? Some companies have told us the employee's Social Security number and the employee key-code number are just like signatures. Naturally, other companies still require paper.
What about spousal consent -- do you need it? If your company decides to adopt an electronic environment, determine how you'll obtain signatures, especially spousal signatures. And try to anticipate whether employees will accept the delay needed to get those signatures. At B&L, we're still debating some of these questions, so at least for the foreseeable future, distributions and loans will hinge on completing paperwork and obtaining signatures.
How important are loans for your company's 401 (k) plan? Do your employees want loans? Find out whether your company wants to provide the administration, too. Administering the program yourself is costly. We estimate that 20 percent of our record-keeping administration costs stem from our loan policies.
Therefore, ponder how often you'll permit employees to take out loans. Can an employee have more than one loan outstanding at the same time? Will you require a set interval between loans? How long can employees take to pay back loans and will that length of time be fixed or flexible? Some of the answers tie in with how paternalistic your company is. Extremely paternalistic companies limit the dollar amount of loan payments to a certain percentage of pay so employees can't get into financial trouble. From your company's vantage point, whose responsibility is it to prevent employees from getting into financial difficulty -- the company's or the employees'? The answers will guide you in developing administrative policies.
DOES YOUR VENDOR DELIVER?
While you're establishing the role of the 401 (k) plan by delineating management and employee expectations and defining the administrative practices and procedures that are right for your plan, you're also defining the standards you want your vendors to meet. Use those specifications to start the selection or review process. As you do, be sure to communicate your company's philosophy on the 401 (k) plan, how the company views vendors and what it expects of its 401 (k) plan vendors. In the end, you want your vendors' style and work ethic to match your company's, plus meet or exceed management's and your employees' expectations.
This is a good time to evaluate how your company views vendors. Are they partners in delivering your 401 (k) product, or are they suppliers? Are relationships based on price, cooperation or both? Does your company change vendors when another one offers the same service or product at a lower price? Does the prevalent corporate view on vendors also apply to 401 (k) vendors, or is there room for another view?
As you review and choose the service vendors, you'll really be addressing the question "What business are we in?" Many companies are asking that today, and it's especially appropriate here. Since the 401 (k) plan is a product you sell to your employees, you need to ask whether your company wants to be in the 401 (k) benefit-delivery industry. If not, outsource the pieces of the business you don't want. We've decided we're in the health-care and optics business, so we're beginning to outsource much of the 401 (k) administration our human-resources personnel once handled.
How many vendors do you need? First, determine how risk-averse your company is. If you've ever changed 401 (k) record keepers, you know it's time-consuming and expensive. While trustees and investment-fund changes aren't as daunting, these moves aren't without costs and headaches, either. Your company's risk tolerance will strongly influence how many vendors you use to administer the 401 (k) plan.
Several investment-fund houses offer one-stop shopping by providing trustee services, record-keeping services and investment-fund management. But what happens if your management (or employees) becomes dissatisfied with the investment funds? Or suppose you're unhappy with the trustee services. If you have all your eggs in one investment-fund manager's basket, changing one aspect of the administration typically requires changing all three.
If your company decides it prefers more than one vendor, you have the option of going it alone or opting for an alliance. In case you're not familiar with the concept, this is a fairly new business structure that ties together record keepers, trustees and fund managers, one of which acts as the liaison with the corporate client. Alliances developed from a corporate need. Many companies didn't want to put all the administration of their 401(k) plans in one place, but they did want the cost and service advantages of consolidation, and alliances, which can be structured in several different ways, fit the bill. They also gained momentum when traditional record keepers and trustee vendors started losing business to investment-fund management houses.
We've been able to structure an alliance that meets the specific needs of our plan. We like the flexibility ours offers and feel we can effectively change any of our 401 (k) pieces without disrupting the whole entity. If you don't like the alliance approach, you'll have to structure your own arrangements with trustees, record keepers and investment-fund managers. Consulting houses can help -- for a price, of course.
DON'T REINVENT THE WHEEL
In all likelihood, your company will outsource the trustee responsibilities and the record keeping. Reinventing the record-keeping wheel is very expensive. In addition, keeping the system up-to-date on new regulations and other developments is quite a capital commitment, although some companies do decide to do it.
Outsourcing the administration of the entire plan is becoming more popular, too. It may be the least expensive alternative when you measure the time human resources spends on 401 (k) administration issues. However, before you completely outsource, think about how your employees will react. What do they expect of the plan administrators? Do they expect the administrators to also be employees or contractual vendors, or can they adjust to using an 800 number? What if they still want to be able to go to human resources with questions and problems -- is management willing to provide that service?
As you evaluate your 401 (k) plan, remember that if it's to succeed, employees must want to participate in and use the plan. Judge the 401 (k) plan's participation level the same way you'd look at product sales reports: Meeting customer expectations increases sales, or in this case, participation. See what asking a few questions can do?
CALLING ALL 401(k) PLANS
Well, Bausch & Lomb didn't quite call all of them. But it did survey 205 companies on their 401(k) investment, communication and education practices. The 123 respondents reported a wide range of plan participation, from fewer than 5,000 participants to 50,000 and up, with the largest sector (21 percent) in the 20,000 to 50,000 range. Fifty-six percent of the respondents had plan assets of more than $500 million, and 31 percent allowed participants to choose from seven or more options.
But what's most striking about the survey results, as you can see here, is the plethora of investment and education options out there. And in many instances, companies that don't have a particular feature in their 401(k) plans are racing to add it in an attempt to satisfy their employee "customers."
Mr. Flint is director of benefits finance at Bausch & Lomb in Rochester, N.Y.
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|Title Annotation:||includes related article; salary-reduction savings plan|
|Author:||Flint, Kevin E.|
|Date:||Nov 1, 1994|
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