Dear Prudence

Offering company stock in employee 401(k)s may not always be wise. Just ask Lucent.

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.

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