Empowered Employees

401(k) participants want it all, including quick enrollment and individualized data.

This is the first part of a two-part series. This month we feature investment firms and alliance partners. Next month, we will feature insurance companies and banks.

Instantaneous access to balances. An array of fund choices and easy flexibility. Online options galore. The 401(k) industry is grooming a sense of consumerism in the American workforce as defined contribution plans become entrenched as the nation’s dominant retirement benefit. While employee entitlement takes root, the list of sponsor options and obligations is expanding in the wake of technological change and legal developments.

Eager to stay competitive, companies have to determine how sophisticated they want their 401(k) plans to be, while ensuring they meet fiduciary responsibilities. Consider the following items that are increasing employee empowerment and putting plan sponsors on the spot:

* The Small Business Job Protection Act of 1996 introduced two laws to encourage extending 401(k) eligibility to new hires. The law became effective January 1, 1999. * Several plan providers, including MassMutual Retirement Services, Putnam Investments, and Fidelity Investments, are including time- weighted returns on statements so that employees know exactly how much their money earned during a specific period. * Last June, the U.S. Court of Appeals for the Ninth Circuit held that the sponsor of an early retirement plan had breached Employee Retirement Income Security Act of 1974 (ERISA) fiduciary duties by failing to warn retiring employees of the serious tax consequences of lump-sum distributions.

Such developments bode well for employees, who should have a greater chance to save money for retirement, better information upon which to base their investment choices, and more-complete information when it comes time for withdrawal. Employers are likely to benefit from an increasingly knowledgeable workforce–so long as plan sponsors diligently educate employees.

Instant Enrollment

New laws dealing with new-hire eligibility will enhance a trend among corporations to enroll new employees immediately. As of year-end 1998, 24 percent of 384 companies surveyed by the Profit Sharing/401(k) Council of America (PSCA) grant newcomers immediate 401(k) eligibility. “That was higher than we expected,” says David Wray, president of PSCA, based in Chicago. “Ten years ago, few employers offered immediate enrollment.” About 32 percent offer plan participation within three months, according to PSCA. In contrast, 48.3 percent of companies surveyed do not enroll employees in plans until one year or longer on the job.

A tight labor market and intense competition for technically skilled workers–who are often financially savvy as well–make some sponsors believe it is essential to dangle this highly prized benefit in front of prospective hires.

“It’s one of the first questions people ask our interviewers, even high school or college graduates going for their first job,” says John Diedrich, director of employee health and benefits at Commonwealth Edison Co., the regulated electrical utility owned by Unicom Corp. (both are in Chicago), with $7 billion in sales in 1998. Salaried employees are enrolled immediately, and those ComEd employees who are part of the bargaining unit must wait three months to enroll, but after that everyone is eligible, even part-timers and interns. “It’s a way to attract people, particularly second- or third-year college students in engineering, marketing, and finance. It prevents employees from leaving, too,” he says.

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