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Commentary

401K ADMINISTRATION SOFTWARE AND INTERNET-BASED 401K PLANS

Among other features, a comprehensive 401(k) administration software system should contain the following:

  • An IRS-approved prototype 401(k) plan customized to the client's specifications. Employers select their plan participation requirements, matching contribution rate (if any), vesting rate for matching contributions (if any), and more in ordering their plan. Free help is available with understanding and choosing among options; final choices are hardwired into the client's software.
  • The client's choice of plan investments. Self-directed discount brokerage accounts and/or no-load mutual funds or load mutual funds are available.
  • Plan-customized forms and documents needed by the employee-participants and the plan administrator (enrollment forms, loan applications, asset liquidation authorizations, etc.). All relevant processing functions take into account the hardwired employer choices.

Among other components, a comprehensive 401(k) administration software product should contain:

  • Current IRS regulations are embedded in the software. The system should be updated each year to reflect any regulatory or other changes; clients receive updated copies of both software and companion materials upon renewal.
  • A CD-ROM that contains the necessary forms for reporting to the IRS, with both blank and completed sample copies provided.
  • Literature and a video which explain the plan in detail, including information on the benefits of investing in a 401(k), how to assess investment risk, how to choose among the available investments, etc.

Features a complete, enterprise-level 401(k) administration software system should include:

  • An easy-to-read-and-follow user's guide that explains exactly what the employer needs to do and how to use the system to do it. A supplement to the guide provides additional details and background information.
  • Help in getting the plan up and running.
  • Literature and a video which explain the plan in detail, including information on the benefits of investing in a 401(k), how to assess investment risk, how to choose among the available investments, etc.

401(k) plans are arguably the best government-sanctioned, tax-deferred retirement savings opportunities in the United States; their numbers have grown commensurably since their institution by Congress in 1978. One estimate, by CHALK 401(k) Advisory Board, Inc., places the number of qualified 401(k) plans in 1997 (the last year surveyed) at 225,000, and the number of participants in those plans at approximately 28 million; the Investment Company Institute (ICI) estimates 36.7 million participants in 1998. New plans continue to grow in number at an annual rate of more than 14% (U.S. Department of Labor).

401(k) plans must be sponsored by an employer. Millions of American workers can't take advantage of the 401(k)'s many attractive attributes because, for one reason or another - typically high plan costs, plan inflexibility, and/or prohibitive minimum participation standards - their employers do not sponsor a plan. In particular, very small, small, and medium-sized companies have found sponsorship difficult if not impossible. Some 89% of very small companies (10-50 employees), 72% of small companies (50 - 100 employees), and 66% of medium-sized companies (100 - 250 employees) do not have 401(k) plans (Census Bureau figures). These figures do not include the companies that have fewer than 10 employees, what might be called "micro" companies.

Internet penetration and usage by small businesses is a key component of 401(k). According to a survey conducted by IDC, Internet usage by small businesses reached 62% in 1998. Total small business spending on Internet related applications is expected to increase from $6.6 billion in 1998 to 418.2 billion by 2002, yielding an annual growth rate of 45%.

The three primary reasons why 80% of America's small businesses do not offer 401(k) plans to their employees are: (a) perceived cost of employer-sponsored retirement plans, (b) perceived complexity of company-sponsored retirement plans, and (c) limited investment options. Mutual fund companies offering 401(k) plans to small businesses do so by pre-packaging administration with their proprietary fund investments; this pre-packaged approach, called "bundled 401(k)" tends to be pricey for small companies, limited features and limited investment options. Employees who participate in bundled 401(k) plans typically do not have access to investments not offered by the mutual fund company, and do not have access to the most popular investment option today-the individual self-directed discount brokerage account

Make your Internet 401k plan appeal to employees through a checklist.

Offering the right number of options and taking a multi-faceted approach to education are the keys to increasing employee participation in 401(k) plans.


Companies not only want to provide good plans, but they want satisfied employees who know how to make their 401(k) plans work best for them.

EDUCATING EMPLOYEES

According to four financial advisors, employee education must be an ongoing process with a variety of methods: seminars, printed materials, videos, software and, now, the Internet or intranet.

A workshop - with visual aides - might be 45 minutes to two hours; it could be done at lunchtime or at department or staff meetings. Some firms handle this with their own HR department.

Many companies use outside vendors to run their workshops, taking some of the burden off HR. For example, if Fidelity Investments administers the 401(k), representatives come in and do the training as part of the vendor relationship. Other companies use outside educational firms, such as KPMG Peat Marwick, Hewitt Associates and Price Waterhouse; some go to colleges and hire business professors to do the training.

While there has been little Department of Labor (DOL) enforcement in this area, there is concern that having the vendor do the education could create a conflict of interest under the ERISA laws. Giving specific investment advice is a prohibited fiduciary transaction, so if a company brings in a provider who gives specific investment advice - which is subject to interpretation - the company could conceivably be held in violation of the terms of the plan. This summer DOE issued new guidelines to clear up confusing areas about providing investment information to employees.

A study by the Employee Benefit Research Institute (EBRI) showed that print works well in convincing people to participate, but it's less effective in convincing them to think about their investment decisions. Workshops are good for the unsophisticated; the sophisticated love computer software.

With so many educational goals in mind, savvy employers are using several methods to target their audience. Rather than using paper descriptions, many firms send their employees videotapes or a software disk. It can be cheaper to send tapes or disks, but not all employees realize that. Patterson suggests sending the materials with a note, explaining that they are easier to work with and less expensive than glossy brochures.

Instead of sending everyone a tape, Veeneman recommends sending everyone a postcard telling them about the video and where it's available. "Put a 30-second message on a postcard, catch their attention, and direct them elsewhere, like to a Web site. The problem with print is getting the employee's attention among all the other communication."

Employers are beginning to put their 401(k) materials directly on the Internet or on their internal intranet. Employees can go into their own computer or to a specific kiosk and call up information about the company retirement plan. These programs can be personalized; employees type in their name and PIN number and find out how much money they have in their 401(k). Or, with an interactive program, employees can go through retirement planning by asking questions (asset allocations? savings? rate of return?). This program also shows past rates of inflation.

Although the Internet's potential for 401(k) education has barely been tapped, it is not likely to replace workshops. Instead, they will exist together. Some people don't like computers, and some don't like sitting in a room. Some prefer the privacy of a screen, while others enjoy group interaction.

Until recently, security concerns kept many people from considering Internet access. Companies felt their internal networks were secure enough, but the big issue has been letting employees dial in from the outside. That whole issue has subsided since SSL (secure sockets layer) has convinced people the Internet is secure enough for doing transactions.

401(k) Fact:

The average 401K account balances at the end of 1998 was $47,000 per participant, up 26% from 1996, according to the ICI and the Employee Benefit Research Institute. On average, 78% of eligible employees will participate in a 401(k) plan if one is made available, with the number of participants growing from 19.5 million in 1990 to 53.2 million in 2000. Some of the increase in participation rates is due to the introduction of "negative election," which allows an employer to automatically enroll employees into the 401(k) when they meet the plan's eligibility requirements. The negative election deferral rate and investment(s) must be defined ahead of time, and the employee must be immediately notified of his or her participation status. Target Laboratories (www.targetlab.com) knows from first-hand experience how successful negative elections can be. Automatic enrollment programs are sanctioned by the IRS under ERISA as long as the employee has ample ability to cease enrollment at will.

NUMBER OF OPTIONS

Once employees know the difference between a stock and a bond, a major part of 401(k) education is informing them what options their plan offers. For the sophisticated, answers about how and why those specific options were selected should be available. But what is the right number of options?

FEAR OF LAWSUITS

Almost everyone agrees a proliferation of options can lead to confusion, but some companies may worry about potential lawsuits from disgruntled employees unhappy with their options or returns. Under the 404(c) regulations, companies can provide as few as three investment options and be protected from liability, but concern persists.

Companies need to have an investment policy for their plans: a statement of intention from the investment or pension committee and a statement that they are selecting funds to meet those goals. There must be an ongoing annual review - with set criteria for how the funds are evaluated.

RESPONDING TO EMPLOYEE REQUESTS

Many large companmies have six options in its 401(k) plan and is currently looking at new vendors.

About 19,000 members are in Dow's 401(k) plan (overseas employees are not eligible), which offers a stable value fund; Dow stock, an employee stock ownership plan; a growth fund, a custom-blended, noncommercial fund; an international fund; treasury money fund; and an index fund.

When A company changed its pension plan last January, employees started paying more attention to their projected retirement income. The company offered three four-hour financial planning seminars run by Price Waterhouse. The free seminars were scheduled at different times and were open to spouses. At the seminars, employees received a retirement planning software disk. The company also uses newsletter articles and a voice response system, which it's considering complementing with the intranet. The company is planning targeted mailings to certain segments, such as nonparticipating employees or those participating at a low level.

When a newsletter article invited employee suggestions for improving the 401(k) plan, almost all replies came from managers or professionals. The company did not hear from its average employee - a high school graduate working in a the company plant. Decisions about adding more options are being made by a multifunctional team with people from communications, HR and finance. When new options are added, there will be a big communications push.

CUSTOMIZED COMMUNICATIONS

IBM has a large 401(k) plan with 180,000 accounts. Approximately 100,000 of them are for active employees.

"A plan sponsor has the fiduciary responsibility to select suitable funds for its population and educate them on the differences of the funds," says Don Sauvigne, program director of retirement and capital accumulation programs for IBM in Mt. Pleasant, N.Y. "A proliferation of options could be confusing. That's why plan sponsors need to be prudent in their design and to provide continual education. So that you're not just responding to the needs or interest of the sophisticated user. You need to make sure you're not sacrificing the needs of the majority."

IBM offers eight different investment options: an S&P 500 fund; a small cap fund; an international fund; an IBM stock fund; a money market fund; a fixed income fund; a bond fund; and a balanced asset fund.

"We have a good spread of funds, but not so many that people will be overwhelmed," says Sauvigne. "We are looking at adding some more in the future. When we add those, we will be very thoughtful in adding them to respond to the needs of our population at that point in time. Five years from now, it may not be the same thing." Participants receive a quarterly four-page newsletter developed for the 401(k) plan, a joint effort by IBM consultants, the finance people and the HR people. "It's not an off-the-shelf newsletter," says Sauvigne. "It is written specifically to our plan and educates people about the eight funds and how they work and it highlights activities of our participants."

IBM also offers Personal Financial Planning, a series of group seminars for employees and spouses, provided by American Express Financial Advisors and Merrill Lynch. About 20,000 people have attended those workshops on all aspects of financial planning.

A service center, including an 800 number with dedicated personnel, helps employees manage their funds and make transfers. Managed by Bankers Trust, the service center, does not advise or educate, but makes sure participants understand the plan.

IBM is updating its financial planning software, which contains all the company benefits or retirement plans and can be accessed by employees at work or at home. The software is being developed internally with assistance from Bankers Trust

Can you increase the average deferral of your workforce while also lowering the company's cost? Possibly. Experience has shown that employees will defer as much as 6 percent of their pay in matches. So offer to contribute 25 cents on as much as 6 percent of pay, for a maximum annual cost of $15,000.

Additional non-profit websites that include relevant unbiased information about 401k plans include: www.advisors-401k.com.

2. USE FORFEITED 401K MATCHES TO ENHANCE EMPLOYER CONTRIBUTIONS.

It's standard practice to require a period of participation in a 401(k) plan before employer matches are vested. Invariably, there will be employees who leave the company before they have become fully vested.

Many employers distribute those forfeited dollars among remaining plan participants, which does nothing to promote greater employee participation in a plan. Instead, use the forfeitures to pay for part of the company match. Knowing that there will be a certain number of forfeitures over time, you can increase the match under the plan. This increase should result in greater participation by non-HCEs, thereby making possible higher contributions by HCEs.

3. MINIMIZE NONPRODUCTIVE PLAN PARTICIPATION BY PROVIDING FOR ONLY TWO ENTRY DATES PER YEAR.

Companies that experience a high turnover or are in seasonal businesses find many workers contribute little or nothing to 401(k) plans. These low levels of participation depress the average deferral percentage, restricting the contributions of HCEs.

But with only two entry dates a year, the average eligibility will be 15 months because for every employee who enters at 12 months, another will be coming in after 18 months. The net result will be fewer new participants in any given year, easing the downward pressure on the company's average deferral percentage.

Adopting these three techniques will enable your HCEs to set aside more tax-advantaged retirement dollars.


401(k)plans

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