Sprucing Up the 401(k)

With other retirement vehicles in dire shape, plan sponsors are rethinking their defined-contribution offerings.

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.


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