Author: Jessica Marquez

As consolidation among 401(k) plan record keepers gains momentum, it might be a good time for plan sponsors to renegotiate the fees they pay.

    In the first four months of this year, there have been six acquisitions of record keepers, compared with nine for all of last year. On April 21, Merrill Lynch, the record keeper for 1,870 defined-contribution plans, announced it was acquiring Amvescap’s record-keeping business, which serviced 1,122 plans.

    As defined-contribution plans continue to become the retirement savings vehicle of choice for employers, competition among the record keepers servicing these plans is expected to increase. In response to this greater competition, a growing number of record keepers no longer can afford to stay in the business, says David Wray, president of the Profit Sharing/401(k) Council of America. “There have probably been 25 providers that have exited the business over the past few years,” he says.

    This spells opportunity for employers with defined-contribution plans, consultants say. “Plan sponsors have the opportunity to put a squeeze on providers to lower fees or provide more services,” says Chris Brown, director of retirement market research at Financial Research Corp. in Boston.

    Plan sponsors need to take advantage of this opportunity and make sure that they are periodically comparing their fees and service arrangements with what is available in the market. “If it’s not up to snuff, it’s very likely that there is a better deal out there,” Brown says.

    Time is of the essence, however, says Fred Barstein, CEO of 401kExchange, a Lake Worth, Florida-based consultancy. This merger-and-acquisition frenzy will only last for another 18 to 24 months, he says. “Now is a good time to just conduct due diligence and get market prices and renegotiate with the vendor,” Barstein says. As more record keepers exit the business in the next several months, plan sponsors will have fewer vendors to choose from and thus less leverage to negotiate prices.

    Periodic due diligence reviews are also important given that a plan sponsor never knows if its record keeper is going to be the next acquisition target. In these cases, it is important that the plan sponsor not just accept the acquirer as its new service provider, says Don Stone, president of Plan Sponsor Advisors, a Chicago-based consultancy.

    “Without doing that due diligence on the acquirer, the plan sponsor opens itself up to liability,” he says. Employers need know what they will review in case their record keepers get acquired, Stone says. “Plan sponsors may be surprised to hear that their record keeper is being bought, but they shouldn’t be surprised about how to handle it.”

    Companies should be aware of the warning signs of a less-than-stellar record-keeping deal. For example, Stone says that if a company’s plan has grown significantly over the past few years but the expenses have remained the same, that normally is a sign that the fees are too high.

    “A huge number of plan sponsors are paying much more than they need to,” he says.

Workforce Management, June 2005, pp. 28-30 —Subscribe Now!

Just months after it settled a closely watched class-action lawsuit over its cash-balance plan, IBM has brushed itself off and is moving on. Some may have thought the company would hunker down after agreeing to a $320 million partial settlement with employees who claimed that its cash-balance plan discriminated against older workers. But instead, IBM has been busy adding a suite of options to its 401(k) plan–now the only retirement savings vehicle available to new employees–to offer employees the same type of paternalistic help found in defined-benefit plans.

    “In some respects, we are redeveloping the defined-benefit plan and making it better,” says Jim Rich, chief investment strategist at IBM Retirement Funds.

    As more companies move away from defined-benefit plans to 401(k)s, many are finding themselves in a new dilemma. While they are happy to have rid themselves of the costs and liability issues associated with defined-benefit plans, they want their new 401(k) plans to offer the same kind of security. From adding automatic enrollment to features that help employees secure income after they retire, many employers today are struggling with how to guarantee that their employees have enough to retire without being responsible for putting up the money themselves.

    Already this year IBM has added automatic enrollment, automatic rebalancing, disability insurance and an annuity income option that allows retirees to receive guaranteed payments over the course of their lives. The company has increased the match to new employees–it’s now 6 percent rather than 3 percent. IBM is also considering offering two more features: automatic step-ups, which would increase employees’ contributions periodically, and a managed account feature, in which the company would contract a financial adviser to manage the assets of an employee for an additional fee.

    An increasing number of 401(k) plan providers have added managed account options to their plans in the past several months because they recognize that employees often need help with investing their retirement savings. IBM, however, is thinking about doing it a bit differently. The firm is discussing offering managed accounts as the default option in its plan, which would mean that employees’ contributions would automatically be swept into a managed account unless they opt out.

    IBM and other employers that have moved from defined-benefit to defined-contribution programs are turning to automatic features to help employees have enough assets to retire. Features like managed accounts offer the hand-holding that employers liked about traditional defined-benefit plans without the liability and cost issues associated with them, consultants say.

    IBM has an 89 percent participation rate in its 401(k) program, but the company has loftier goals than having a high 401(k) participation. Since its employees tend to retire at age 60, IBM wants to make sure that they can keep doing so, Rich says.

    “When I go to the doctor and something is bothering me, I don’t expect him to hand me a manual,” he says, adding that he does not think it is fair to assume that employees are investment-savvy, even if they do participate heavily in the 401(k) program. “This is a very complicated thing.”

    IBM does offer a financial asset allocation tool online as part of a partnership with Financial Engines, but these services only tell investors what kind of funds they should choose. They do not recommend specific funds. “If employees ask which U.S. stock fund they should invest in, we can’t tell them,” Rich says.

Fee concerns
    Employers largely have been hesitant to offer managed accounts as the default. They recognize the value of offering financial advice to plan participants, but sweeping them into a program in which they would have to pay an added fee–which usually ranges from 15 to 30 basis points on top of the fund expenses–could lead to backlash from employees and raises liability concerns.

    “We are exploring this option with outside counsel,” says Brock Johnson, vice president at Morningstar Associates, which teams up with fund companies to offer a managed account program to 401(k) plan sponsors. Johnson says that all of Morningstar’s fund-provider partners are examining the issues of offering managed accounts as a default, but none of their clients are doing it yet.

“IBM is in a great position to do this because their fees are so conservative. It’s all going to be in the communication.” –Silvia Frank, manager of defined-contribution plan at Trinity Health

    “I certainly think it’s going to be something that will be used,” he says. While 21 percent of 401(k) plans offered managed accounts in 2003, up from 12 percent the previous year, it is “very rare” for an employer to offer this as a default, according to David Wray, president of the Profit Sharing/401(k) Council of America, a national, nonprofit association of 1,200 companies.

    IBM, however, may have found a solution to the fee issue, Rich says. IBM is considering offering tiered pricing for managed accounts. Under the concept, employees would be automatically enrolled into a managed account program using a couple of IBM’s four “life strategy funds,” which are funds that invest in collective trusts. The funds have expense ratios ranging from 11 to 16 basis points, and the added fee to the employee would be just 10 basis points. As with its current automatic enrollment program, employees would be able to opt out.

    Once employees gain more assets and get more comfortable with the program, they could opt for a more complete managed account, which would offer financial advice and management based on all of their assets, for around 30 basis points, Rich says. Before making a decision on offering managed accounts, IBM wants to make sure the cost is worth the advice. “Fees are one thing, but we also need to look at how good the advice is, and that requires a lot of due diligence,” Rich says.

    IBM is in a good position for a test run because its own funds have such low fees, says Silvia Frank, manager of the defined-contribution plan at Trinity Health, a health care provider based in Novi, Michigan. The average fee for retail lifestyle funds can range from 25 basis points for index funds to 85 basis points for actively managed funds, according to Hewitt Associates.

    “IBM is in a great position to do this because their fees are so conservative,” Frank says, noting that these low fees are “not typical.” She says that the challenge IBM may face if it goes through with offering tiered pricing is getting employees to understand it. “It’s all going to be in the communication,” she says.

Making the money last
    While offering managed accounts may help employees accumulate enough assets for retirement, IBM’s new annuity feature is designed to help plan participants have enough income after they retire. “The big risk we all face when we retire is, what if we live too long?” Rich says.

    Under IBM’s new program, which was designed by Hueler Cos. of Eden Prairie, Minnesota, employees can go to a Web site, input their age and marital status and within a day receive a list of price quotes for fixed annuities. Rich says that having insurers bid for the business of an employee solves one of the main problems with offering annuities: the costs. Also, since these annuities are institutionally priced, they end up costing “tens of thousands of dollars” less over the duration of the contract, he says. The costs of an annuity are taken out of the employee’s payments and thus vary on a case-by-case basis. Hueler takes a 1 percent fee.

    Along with the quotes, employees can view the credit ratings of the insurers and contacts for more information. Employees can opt for step-ups of 2 percent to 5 percent to make sure their income payments stay ahead of inflation. The feature also allows employees to pay extra to establish guarantees in the case of death.

    For example, if the employee opts for a “five-year certain,” it would mean that the family would receive income for the next five years after the employee’s death. IBM is offering guarantees for five-, 10- , 15- and 20-year periods. After choosing the annuity they want, employees then roll over their retirement assets into an IRA account, which is invested in an annuity so that IBM has no fiduciary liability over those assets, according to Rich. “It becomes the decision of the employee,” he says, noting that IBM offers credit ratings to assist with that decision.

    The fiduciary liabilities involved with offering annuities are a major reason that 401(k) plan providers have backed away from these options, Wray says. IBM, by offering the annuity option outside of its plan, solves this issue and takes out the cost concern, he notes.

    While employers are discussing how to make sure their employees have enough to retire, ensuring that they have enough to last the rest of their lives is just an emerging concern, notes Martha Tejera, consultant and principal at Mercer Human Resource Consulting. “I think IBM is out in the front, and I would like to see other companies doing this as a distribution option,” Tejera says.

Workforce Management, June 2005, pp. 79-80 —Subscribe Now!

How many people does it take to get 400 employees to attend a 401(k) educational session? According to Avaya, the answer is one. And that person is Suze Orman.

    On a tour that started April 1, the personal finance celebrity visited seven of Avaya’s offices as part of the company’s first 401(k) day. She was met with huge crowds–the turnout was so big at its Basking Ridge, New Jersey headquarters that the company had to move the event from the auditorium to the cafeteria. “We had to hire lighting and production people to make it work,” says Bruce Lasko, senior manager of global compensation and benefits.

    What was particularly effective about Orman was that unlike the typical 401(k) meetings the company had held, the focus was not just on 401(k) savings and diversification. Instead, Orman tied those ideas into credit card debt and other financial issues that people deal with every day.

    “One of the problems about retirement planning is that it can be boring and complex,” Lasko says. Orman, who has television specials, books and a waitress-to-wealth biography to her credit, was anything but that. Avaya employees who weren’t on the tour stops could view the speech through a webcast.

    Avaya also worked with John Wiley & Sons to publish a customized book, 401(k) for Dummies, which it distributed to employees. Lasko declined to say how much Avaya spent on the initiative.

    The Orman tour was Avaya’s attempt to solve the problem that many 401(k) plan sponsors face: how to get employees to focus on their retirement. For a year, the company had offered free online advice to help employees figure out how they should invest their 401(k)s. Despite providing training on the program, only 15 percent of employees had used it.

    Many companies have responded to employees’ seeming lack of interest in their 401(k)s by adding automatic enrollment. The problem with that, Lasko says, is that it does not prompt employees to think about and understand the issues involved with saving for retirement. “We want employees to take the first step,” he says.

    When it comes to how to choose investments, however, Lasko recognizes that employees need more hand-holding. The company provides automatic step-ups and rebalancing features, and Lasko is considering offering a managed-account program, which would enable employees to have their investments managed for them for a fee.

    Ted Benna, who designed the first 401(k) plan 25 years ago, says that Avaya’s approach highlights an issue that many companies miss. Too often, he says, employers just offer automatic enrollment without education. But sweeping employees into a plan at a 3 percent contribution rate does not mean they will have enough to retire, he says. “Also, it’s been proven that if employees are distracted by financial problems, it messes them up big time in terms of performance,” he says. That’s where Orman’s message about overall financial health comes into play.

    Whether Avaya’s approach will be successful in the long term remains to be seen. In April alone, however, the company saw 311 employees sign up for the 401(k) plan and 1,169 employees increased the percentage of their deferrals.

    Nevertheless, Alicia Munnell, director of the Center for Retirement Research at Boston College, thinks that not offering automatic enrollment is a mistake, no matter what kind of education an employer provides.

    “I think we should make 401(k) investing as easy as possible,” she says. “If this works for them, that’s great. But I don’t think it’s the most effective thing for everyone.”

Workforce Management, June 2005, p. 26 — Subscribe Now!

When Barbara Kinzer began computer training on her first day of work at Borders Group in 1992, she didn’t know what to expect. Having been out of the workforce for more than 25 years, she couldn’t remember the last time she had been in an office, let alone in front of a computer. “They said, ‘OK, Barbara, let’s get started,’ but I didn’t even know how to turn the computer on,” she says.

    To her relief, no one laughed. Kinzer, 62, attributes her quick rise in the ranks at Borders to the patience that managers had with teaching her the ins and outs of technology and how to work a register. “They recognized that my biggest strength was my knowledge of books,” she says. Today, Kinzer runs the corporate training program out of Borders’ headquarters in Ann Arbor, Michigan.

    Recruiting and retaining older workers has been a strategy that consultants have been hammering into the heads of employers for years. The reason, they say, is that as the baby boomers begin to retire, there will be a shortage of experienced workers. According to Bureau of Labor Statistics data, the pool of U.S. workers ages 35 to 44 will shrink by 7 percent between 2002 and 2012.

    But for Borders, the need to have older workers goes beyond that.

    In the late ’90s, when online bookselling was sweeping the nation, Borders took a hard look at the demographics of its customer base. From that research, it discovered that 50 percent of the books bought in the U.S. were purchased by consumers over 45. To reach out to those customers and differentiate itself from the impersonal online booksellers, Borders created a formal hiring and retention initiative aimed at older workers, says Dan Smith, senior VP for human resources. “We found that they better related to our customers,” he says.

According to Bureau of Labor Statistics data, the pool of U.S. workers ages 35 to 44 will shrink by 7 percent between 2002 and 2012.

    Today, 16 percent of Borders’ workforce is over the age of 50, up from 6 percent in 1998, when it started its recruitment effort. The book retailer has found other advantages to having older workers in its stores. According to Smith, the turnover rate for workers over the age of 50 is 10 times less than those under 30. Borders has seen its turnover drop 30 percent since it began its effort to recruit older employees. “These workers have a great passion to be connected to the community, and our bookstores provide them with that venue,” Smith says. Also, since the work is often part time, it’s a great fit for them.

    To further attract and retain these employees, Borders recently added medical and dental benefits for part-time workers. Now the firm is planning to add a corporate “passport” program by which employees could work half the time in a store in one part of the country and the other half at a different store. The company already has a few instances where older workers live in a warm climate, such as Florida, during the winter and then in the Northeast during the spring and summer. Borders accommodates those needs on a case-by-case basis. “Right now it’s not easy for the employees because they have to do their own research and contact the stores on their own,” Smith says.

    To help these workers, Borders is creating a section on its intranet where employees will be able to sign up to work in different parts of the country. For example, employees could post that they are going to be in Florida for four months, and conversely the general managers could see if there are potential employees they could put in their stores, Smith says. Borders hopes to have the tool up and running this year.

    Kathleen Rapp, national program consultant at AARP, predicts that once Borders introduces its corporate passport program, other companies will follow. AARP just named Borders to its recently launched Featured Employer Program, which allows selected companies to advertise job openings to older workers through the group’s Web site. Borders is one of 13 employers named. “None of the other featured employers on our list have a program like this,” Rapp says. “It really goes a long way to retaining older workers.”

    In another lure for older workers, Borders also is discussing adding an income annuity option to its 401(k) plan. This feature would allow employees to invest a portion of their salaries into a deferred-income annuity, which would guarantee them a set amount of monthly income after they retire for good.

    Specifically, Borders is looking at Merrill Lynch’s Personal Pension Builder, which the company recently introduced with MetLife Retirement Savings.

    Smith would not say when Borders would make a decision on adding the option.

Workforce Management, May 2005, p. 28 — Subscribe Now!

Employers may have thought that the proposed regulation on phased retirement would put to rest their concerns about retaining older workers, but they could be in for a new round of headaches.

    The rule, which was proposed by the Internal Revenue Service and U.S. Department of the Treasury, would allow older employees to work part time and receive benefits accrued in their pension plans, a seeming benefit for both employers and employees. There is a catch, however, in that employers would have to conduct annual audits of how many hours employees are working to determine how much in pension benefits they receive.

    Under the proposal, employees’ benefits during phased retirement would be limited to the percentage by which they expect their hours to be reduced. For example, employees who expect to reduce their hours by 25 percent would receive up to 25 percent of their benefits during the phased retirement period. If employees end up working more than they expected, however, the employer would have to reduce the pension benefits being paid out to them.

    This means that employers who pay employees annual salaries would not only have to count their employees’ hours during the phased retirement period, they also would have to know how many hours they worked when they were full-time employees. Such calculations will require hours of administrative work particularly for companies with salaried employees, versus those that pay by the hour. Many observers expect employers to rely on technology to help them with this burden. Creating an automated system to do the calculations would cost about $100,000 for a one-time implementation, according to Valerie Paganelli, senior consulting actuary in the Seattle office of Watson Wyatt Worldwide, who testified on the subject at a March 14 hearing before Treasury and IRS officials.

    Counting employees’ hours and figuring out what percentage of a pension benefit they should receive becomes even more complicated given that employees’ hours often change from week to week. For example, an employee could work 20 hours one week and 30 the next. “This is just not practical,” says Bruce Schobel, chairman of the retirement security principles task force at the American Academy of Actuaries, who helped write the group’s comment letter to the Treasury Department and the IRS. Schobel says the academy views the proposal as a good step, but it does not believe that employers of salaried employees would be willing to implement systems to track their hours.

“This is going to be incredibly burdensome, and human resources professionals are the ones who are going to have to deal with it.” –Wendy Wunsh, former manager of employment regulations at SHRM

    The Society for Human Resource Management and the American Benefits Council have expressed similar concerns. “This is going to be incredibly burdensome, and human resources professionals are the ones who are going to have to deal with it,” says Wendy Wunsh, former manager of employment regulations at SHRM. “We are not saying that we don’t want to do it, but we also want to make it easy as possible.”

    Another concern about the proposal is that it would allow for phased retirement at 59½, which many believe is too late. In its testimony, the American Benefits Council argues that the age at which phased retirement begins should depend on the terms of the plan. Many employers’ plans allow employees to retire at 55, and if phased retirement does not kick in until 59½ it could cause employees to leave their jobs, take their pensions and then work somewhere else, notes Jan Jacobson, director of retirement policy for the American Benefits Council.

    The other issue is that under current law, an employee who begins to take pension payments before 59½ gets hit with a 10 percent tax. Schobel says that if employees want to access their pension benefits and pay the penalty, it should be their prerogative. A Treasury Department official, however, says that the agency is unlikely to permit phased retirement before 59½ and subject employees to this tax because it would invite “misunderstanding and disappointment.”

    Jacobson and others predict that the IRS and Treasury will come out with final rules by the end of the year and that the hour-counting will be part of it. “Employers will have to figure out if offering phased retirement is worth it,” she says. “A lot of employers may decide it’s not.”

Workforce Management, May 2005, p. 26 — Subscribe Now!

M elenie Bloch does not like holding her employees’ hands. As the pension administrator for Univar USA Inc., she believes that her job is to educate workers about their options for retirement but not to make decisions for them.

    But when the chemical distribution company’s 401(k) plan provider, Fidelity Investments, launched a pilot program that would automatically sweep a percentage of employees’ pay into so-called lifecycle funds, Bloch didn’t hesitate to be one of the first to sign up her company. Lifecycle mutual funds periodically rebalance between stocks and bonds based on the investor’s retirement age, and for Bloch, “it was a no-brainer.”

    “It’s amazing to me that more people aren’t doing it,” she says.

    For Bloch and a growing number of 401(k) plan administrators, deciding whether to be a parent or teacher is becoming an increasingly fine line. On one hand, they don’t want employees to feel that they are being forced into financial decisions, but on the other hand, if employees aren’t signing up to participate in the 401(k), “it means they don’t understand the consequences of their inaction,” Bloch says.

    Univar, based in Kirkland, Washington, was one of the first companies to make lifecycle funds a default option in its 401(k) plan. It’s a trend that now is emerging as more executives decide that the risk of employees not having enough saved for retirement is more of a danger than the risk of them losing all of their money by investing in equity funds. Lifecycle funds seem to address both potential fears. As of January, 1,517 of Univar’s 3,200 plan participants were invested in lifecycle funds, 39 percent through the default.

    At any conference or meeting on retirement benefits, employers can be heard fretting about how their workers aren’t saving enough for retirement. Their concerns aren’t unfounded. According to a 2003 Hewitt Associates study, 49 percent of employees surveyed said they were contributing less or much less to their retirement savings than they probably need to.

    “Employers recognize that at this rate very few people are going to be able to retire at 65 and play golf,” says Martha Tejera, a principal at Mercer Human Resource Consulting. “You want people working because they want to, not because they have to. You don’t want people hanging around because they can’t afford to retire.”

“On autopilot”
    The adoption of automatic enrollment, by which employees are placed in a 401(k) plan and must opt out if they don’t want to participate, has partially solved this problem, but not entirely. Most workers just stay in the default option, which is usually a fund that invests so conservatively that it has little chance of providing them with enough savings for retirement. Sixty-seven percent of plans have money market or stable-value funds as their default option, according to Hewitt.

    This is where lifecycle funds come in. These investment portfolios, which are mutual funds that invest in a group of mutual funds, name the date of retirement and automatically adjust the balance of stocks and bonds as time passes and the employee gets closer to the date of retirement.

    “Employers just have to look at the employee’s birth date and put them in the right fund,” Tejera says. “It puts the whole thing on autopilot and they don’t have to rebalance.” In the past year, Putnam Investments, MassMutual Financial Group, Russell Investments and TIAA-CREF have launched these funds, joining the likes of Fidelity and T. Rowe Price, which have been in the market for years. Lifecycle funds, also known as target-date funds, were the most rapidly adopted automatic plan features last year, according to a Fidelity survey, which found that 1,200 employers added its lifecycle products in 2004.

    There is a problem with how employees use them, however. Some defeat the purpose of the funds by putting only a portion of 401(k) savings into them while also investing in other funds, says Lori Lucas, director of participant research at Hewitt Associates. That negates the automatic rebalancing feature of the funds. While 38 percent of 401(k) plans offer lifecycle funds and 37 percent of plan participants use these funds when they are available, only 13.2 percent of those participants have all of their noncompany stock investments in a single lifecycle fund, according to Hewitt.

    “Employers really need to make it clear that there is a fork in the road and that you either choose one lifecycle fund or you choose a bunch of other funds,” Lucas says.

    This is where Bloch, as a pension administrator, puts her foot down. While she recognizes that there are participants in her plan who are misusing lifecycle funds, she does not have the time or resources to alert each of them to the fact that they are doing it wrong, she says. “I don’t believe in being a parent; I believe in education,” she says.

“Employers really need to make it clear that there is a fork in the road and that you either choose one lifecycle fund or you choose a bunch of other funds.” —Lori Lucas, director of participant research at Hewitt Associates

    To this end, Univar, with help from Fidelity, periodically distributes information about its lifecycle funds and how they work. And that’s where the involvement ends.

    Parsons Brinckerhoff, a New York-based engineering consulting firm, is another company that is considering making its lifecycle funds a default option in its 401(k) plan. The company began offering T. Rowe Price’s lifecycle funds, called the Retirement Funds, in July. It already has about 200 of its 5,000 participants using the funds, says Mary Buckley, the company’s human resources administrator for retirement plans.

    The company views it as a natural progression to consider replacing its stable-value selection with these funds, Buckley says. “We want people to have the best rate of return with the least amount of risk,” she says. “The stable-value option is great for no risk, but the rate of return is less than stellar.” Parsons’ 401(k) committee expects to make a decision about the default option this year.

Awaiting guidance
    Many other companies, meanwhile, are waiting on the sidelines. Their hesitation is warranted, given that companies have been given little or no guidance from regulators about their liabilities if they offer these funds as the default option, say attorneys and consultants.

    “As a fiduciary, the government has made it easy for me to warn on one thing regarding default options: risk of loss,” says Steven Friedman, an attorney in the New York office of Littler Mendelson. The liability implications of being too conservative in the selection of a default option are unclear. Sixty-seven percent of plans with automatic enrollment default to a money market or stable-value fund, according to Hewitt.

    Given the tenor of the times, it’s not hard to imagine employees filing suit against former employers because they were placed in low-yielding money market funds, stayed there for 30 years and now don’t have enough money for retirement.

    “Plan sponsors are clearly split on this issue of growth versus preservation,” says Sam Campbell, a consultant at Financial Research Corp., a Boston-based firm. He says the pendulum is swinging toward the idea that employers could get in more trouble if they lean toward preservation .

    Cadmus Communications, a Richmond, Virginia-based publisher and printer, confronted this issue head-on last year when it adopted T. Rowe Price’s Retirement Funds as the default option for its 401(k). For benefits manager Cindy Ellis and the attorneys with whom she consulted, the choice seemed clear. The main concern for employers like Cadmus is that employees will come to them in 30 years saying, ” ‘You should have told me to do this,’ ” Ellis says.

    Lifecycle funds may be the solution because they provide investment options that make sense for the young worker in his 20s as well as the older employee who needs to have a more conservative portfolio, Ellis says. Cadmus, which used to have both a traditional defined-benefit plan and a 401(k) plan, froze the former in August 2003. The following month, it implemented a 2 percent default into T. Rowe Price Retirement Funds for employees who had not already invested in the company’s 401(k) plan. The company also offers a 2 percent match into its 401(k) plan. There were no changes for employees who already were contributing to the plan, which now has $133 million in assets and 3,500 participants.

    Cadmus has started to track the behavior of the participants in the plan, and Ellis says there has been good feedback so far. Initially, some employees were splitting up their 401(k) accounts between two lifecycle funds because T. Rowe Price only had funds with retirement dates in 10-year increments and they didn’t know exactly when they would retire, she explains. This became less of an issue last year when T. Rowe launched target-date funds in five-year increments. “We advised employees to choose the date they turn 65,” she says. Cadmus held a series of employee meetings when the new funds were added to the plan, and continues to explain them and answer questions in mailings and statement inserts.

    While education will help lifecycle funds become more popular as default options, consultants say there won’t be a widespread adoption until regulators address the liability issue.

    The Internal Revenue Service has issued guidance saying that it would be appropriate for employers to make balanced funds, which are equity investments, a default option in their 401(k) plans. But there is still ambiguity about the use of lifecycle funds as the default, Lucas says. Financial Research Corp.’s Campbell believes that it’s only a matter of time before the IRS or another government body addresses the liability of having default funds that can’t outperform the market. The IRS or Department of Labor will likely provide more specific guidance on the question as early as this year, Campbell says.

    There is one encouraging sign for companies that are offering lifecycle funds as the default: The Bush administration’s Social Security reform proposal also calls for them to be the default option for investors over 50. If adopted, that would be a fairly good informal seal of approval.

    “If this happens, it would certainly send a signal to private-sector employers that you might want to do that,” says Patrick Purcell, specialist in social legislation for the Congressional Research Service at the Library of Congress. Still, he says, “it’s not the same thing as legislators saying this is OK under ERISA.”

Workforce Management, April 2005, pp. 65-67 — Subscribe Now!