For finance chiefs, what seemed to be a back-burner issue is now aflame. "This case makes it clear that if you have your own company stock in a 401(k) plan and there is any indication that it is headed for trouble, you cannot ignore the potential impact on plan participants," says Watson Wyatt's Weddell. "This is a threat that must be taken seriously. That said, this case has a long way to go, and there is no guarantee the plaintiffs will prevail."
Russ Banham is a contributing editor at CFO.
Borrowing Privileges
Companies Ease Loan Repayment for Laid-Off Workers
The topic of 401(k) plan balances may be a sore subject these days, but at least a handful of companies, including Lucent Technologies, are easing some of the pain for laid-off workers who have loans outstanding on their accounts.
Typically, 401(k) plan rules require that employees pay up these loans within 90 days of leaving or face steep income and penalty taxes on the withdrawal. Lucent, however, amended its plan last spring to allow former workers to continue paying loans according to their original schedules through coupons or electronic funds transfer. "We did this to offer more flexibility to people whose positions have been eliminated or who have taken early retirement," says spokeswoman Michelle Davidson, noting the payments are made directly to Fidelity Investments, the plan administrator.
It's not an entirely new idea — AT&T instituted a similar measure last year, and it has been standard practice at Ford Motor Co. for many years. But experts say more companies are now considering the idea, given the recent rash of layoffs.
"This is certainly something we've been hearing about among our members," says James Delaplane, vice president for retirement policy at the American Benefits Council. Indeed, "it's a way for companies to say, 'We don't want to hurt you any more than we have to,' " says Karen Field, senior manager at KPMG LLP's compensation and benefits practice in Washington, D.C.
The main cost to employers that extend 401(k) loan terms is the administrative burden. Revising the plans to accommodate such a measure is "not trivial" and often requires board approval, according to Field. For companies that manage their own plans, or whose administrator won't handle payments outside the normal payroll deductions, there is also the hassle of collecting checks and keeping track of payment schedules. However, there are few cash costs, and minimal employer liability, since the borrowing is against an employee's own funds.
Some employers are also exploring the idea of stepping in with the necessary funds, though, says Field, with so-called make-up loans, where the employer effectively pays off the 401(k) loan and receives the money back with interest over time from the employee.
Fifty-eight percent of plans, accounting for 82 percent of participants, offer loans, according to research on 1999 401(k) plan data by the Employee Benefits Research Institute. Fewer than 20 percent of participants had loans outstanding at the end of that year. —Alix Nyberg
Combination Punch
The Benefits of Offering a Pension Plan and a 401(k)
Companies that offer traditional defined-benefit plans tend to offer better 401(k) plans, too, according to a recent survey by William M. Mercer Inc. The reason? Better financial discipline.
Employers that have both defined-benefit and defined-contribution (DC) plans, says Laurel Cochennet, a Mercer retirement consultant who helped write the study, "tend to carry over a certain degree of perspective and finance influence" from their defined-benefit plans to their 401(k)s or other employee savings plan. That influence, according to the study, contributes to DC plans that are more generous, offer quicker vesting policies, and are more communicative with their participants.
For example, 45 percent of companies with both types of plans offer immediate vesting on the employer's matching contribution, compared with only 27 percent with just DC plans. In addition, some 34 percent of companies with both plans target communications to participants who don't diversify, compared with only 18 percent of DC-plan-only companies. And 66 percent of companies with both plans have a formal investment policy in place, compared with just 45 percent of those with a solo DC plan.
The study also looked at the differences among plans when either the finance department or the human-resources department had more influence. When finance is in charge, the study found that DC plans were more likely to have a nonmatching company contribution, a discretionary company contribution, and employer-paid plan fees. Moreover, when finance exerts its influence, says Cochennet, the plans typically have "performance standards in place and [administrators] are more likely to intervene if things aren't being done properly."
The study was based on interviews with 252 defined-contribution sponsors, 58 percent of which also offered defined-benefit plans. The plans had total assets of $125 billion and averaged 8,100 employees per plan. —Lori Calabro
Double Rewards
Differences in features between companies that offer only a DC plan versus a DC/DB combo.
Source: William M. Mercer Inc.
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