Magazine article Workforce Management

401(k), New and Improved

Magazine article Workforce Management

401(k), New and Improved

Article excerpt


THE 401(K) TURNED 27 this year, and like any young adult, it went through its badboy phase, where guidance was absent, fees were high and solid investment choices were paltry. But over the last few years, more companies have helped the 401(k) and other defined contribution plans grow up by adding wise features like auto enrollment, auto escalation, default options and targeted investment advice.

"The defined benefit plan was totally paternalistic," said David Wray, president of the Profit Sharing/401k Council of America, Chicago. "And then the initial 401(k) was totally nonpaternalist. What's happening is the defined contribution plan is now swinging in the middle between the two."

Employees in 401(k)s are still ultimately responsible for their retirement security, of course, but forward-thinking companies are offering their workers more than bare-bones tools to make the most of these programs. They're implementing designs that make it easy for workers to get on the right savings track from the beginning.


Not surprisingly, large companies with defined benefit plans-either open or frozen-tend to be more inclined to sweep their employees into auto enrollment, auto escalation and default investment schemes, which leave very little room to not do the right thing. Other firms are getting the hint, too, and 44% of them now employ auto enrollment, according to Hewitt Associates in Lincolnshire, Ill.

Devon Energy Corp. of Oklahoma City gave employees the option to give up their pension plans and go into a "super 401(k)" this past year. Those who chose to stay in the defined benefit plan could still access the regular 401(k) plan, but employees who opted out would have one of the best offerings around, with generous employer contribution levels, auto everything and low fees. (To be sure, the aim is to reduce the company's future pension liabilities.)

"Our sense was since we're going to this super 401(k), we're giving the employee flexibility and control over retirement, but we're also giving them responsibility," said Paul Poley, vice president of human resources. "If we're going to shift some of that risk, we had an obligation to better manage that risk."

That's the conclusion that executives at AmeriHealth Mercy Family of Companies, which provides managed care to Medicaid programs, came to as well. In addition to the company's cash balance pension program, as of Jan. 1, employees were automatically enrolled in the 401(k) plan. Officials at Philadelphia-based AmeriHealth spent three months educating employees about the importance of retirement saving and how auto enrollment would work-then went ahead and implemented it anyway.

"We really thought it was important for us to take that step," said Jeanie Hefferman, senior director of human resources benefits, adding that for many employees the cash balance plan wouldn't provide adequate retirement savings. "Our experience tells us that it's not that people don't want to save; they're just apathetic about it. So we figured we'd do it for them."

There was a 14% increase in participation since the first of the year, Ms. Hefferman reports. One worker even wrote Ms. Hefferman a personal note to say that after working for the company for 13 years and not participating in the 401(k), the automatic enrollment forced her into the program.


Companies vary on how much they should strong-arm employees. A typical approach is to auto enroll workers at the level where they are eligible for the full employer match. But some view that move as too intrusive.

"Auto enrollment isn't a slam dunk for every company," said Robyn Credico, national director of Watson Wyatt's defined contribution practice. "It may get good participation rates, but you may lower the overall savings rate. …

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