Sprucing Up the 401(k)

While there are many variations in matching formulas, an employer pay-in of 50 percent up to the first 6 percent of salary that the employee contributes is increasingly considered to be the standard. Matches should be stretched out across as big a percentage of pay as possible to encourage workers to allot higher percentages of their paychecks to their 401(k)s, says Michael Weddell, a Watson Wyatt Worldwide consultant in Detroit. For instance, 50 percent on the first 6 percent of pay is better than a full match on the first 3 percent.

Whatever the formula, some kind of match is better than none. The absence of one can convey the impression that it's OK not to save at all, "instead of it being a necessary part of one's retirement planning," according to Weddell. By supplying a percentage match, an employer can cue employees about the proper level to contribute. Weddell says a 6 percent match might cause the employee to think, "It seems to me that the design of match tells me that 6 percent is the right number."

Matches can also be shaped to make up for the demise of a traditional pension. When Rockwell Collins freezes its defined-benefit plan later this year, senior management wants its 401(k) to remind workers of a traditional defined-benefit plan and be more attractive to midcareer hires. Just after employees stop earning new pension benefits in September, the company will start making payments to its workers' 401(k) accounts amounting to 0.5 percent to 6 percent of their salaries, divided into six ranges.

To mimic the structure of the frozen pension plan, the company has designed a point system under which the amounts paid in will be based on the employee's age and length of service. The new contributions, piled on top of the 75 percent match in company stock of the first 8 percent of salary that Rockwell has provided for years, are an attempt to replace some of the funding lost to the pension freeze and to prompt employees to save more, say Rockwell managers.

Linking a match to corporate profits can provide an incentive for employees to stay with a strong-performing employer, say advocates. Because Call 4 Health, a medical answering-service firm in Boca Raton, Florida, pays percentages of its net profits into workers' 401(k) accounts, employees can get a sense of taking part in the company's growth, says CFO Nicholas Koutrakos. Net profits have burgeoned 20 percent per year for the past five years, according to Koutrakos.

But a profit-sharing match at a company with more-volatile results can create months of uncertainty for participants. Such plans force employees to choose their contributions before they know what their employers will contribute, according to Weddell. Informing employees that a match will be determined by year-end profits "sounds like a pretty weasely promise," he contends.

One alternative is simply to inject cash into the plan, with no strings attached. RLI Insurance Co., a Peoria, Illinois-based property-casualty insurer that is terminating its defined-benefit plan, contributes an automatic 3 percent of salary to every employee's 401(k) plan, even if the employee contributes nothing. (The company has an additional profit-sharing portion that last year amounted to about 2 percent.) "A match penalizes those least able to contribute to retirement," contends Jeff Fick, the company's vice president for human resources. "If employees can't participate, they lose the contribution."

Higher Education
Along with simplifying their plans and improving funding, companies are also seeing a need to provide more education and advice. With the move to automatic enrollment, for example, plan sponsors — required by the Employee Retirement Income Security Act of 1974 (ERISA) to operate solely in the participant's best interest — "want to make sure employees understand what money is coming out of their paycheck and how it's invested," says Sanchez.

The loss of the guaranteed income triggered by pension freezes is also driving the need for education. "This becomes a little more important, since the safety net of the defined-benefit plan [is gone]," says Denny Popovec, vice president of human-resources delivery at Rockwell Collins.

Furthermore, the bar for employee training is rising. "We're seeing education move from [training in] overall plan design to much more individualized and personalized education," says Alford. "We're also finding that what participants want is not education, but advice."

In light of such changes, CFOs are rethinking the quality of their education efforts. Some can be quite self-critical. Southwest Power Pool's Dunn, for instance, gives his organization high marks for its match — 75 cents on the dollar up to the first 6 percent of salary deferred — and its range of 19 investment options. But he feels that his company hasn't always been up to snuff in terms of education.

As evidence of that, Dunn says, the average age of company employees is 40, and 20 percent of the plan's assets are invested in cash and cash options. When he looks at such figures, the CFO feels that participants might not end up with enough to retire on. To remedy the situation, the company has brought in a registered investment adviser to meet with employees one on one and review their investments, retirement goals, and risk profiles. Many employers have long been wary of providing such a service because of fears that poor advice might lead to poor investment performance, and, in employee lawsuits. Indeed, under ERISA, workers can sue employers for providing a poor range of investment choices, as well as for conflicts of interest on the part of the adviser. But a 2001 Department of Labor advisory letter enabled sponsors to offer advice based on third-party analyses. Bills currently before Congress could also protect employers from liability incurred by investment advisers they hire for their plans.

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