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Non-Compete Agreements: Going, Going, Gone

You know that a lot of workforce trends start in California and the West Coast in general, but the Golden State is also a place where a lot of workforce law gets focused and refined.  Here is the latest one, and it pretty much drives a stake through a legal issue that drives a lot of people crazy–noncompete agreements.

As the San Francisco Chronicle reports on Thursday, August 7, “California employers can’t limit their employees’ right to work for a competitor or solicit former clients after they leave the company, the state Supreme Court ruled today. In a unanimous decision, the justices said state law since 1872 has forbidden so-called noncompete clauses that restrict management employees’ options in their next job or business.”

The reason this is important, as the Chronicle points out, is because “Courts in some states have upheld [noncompete] restrictions, and the federal appeals court in San Francisco has interpreted California’s law to allow a company to limit its employees’ future job choices as long as it doesn’t prohibit the employee from working in the same field. But the state’s high court said any such restriction conflicts with California’s ‘legislative policy in favor of open competition and employee mobility.’ ”

In other words, California’s highest court says that allowing workers the mobility to seek new jobs and openly compete on the free market trumps, in most all cases, the ability of an employer to restrict a worker from going to work for a competitor.

The Chronicle quoted Justice Ming Chin, who said, “An employer cannot by contract restrain a former employee from engaging in his or her profession, trade or business.” According to the justice, “the law recognizes only a few limited exceptions, for noncompete agreements that are part of the breakup of a corporation or partnership.”

If you’re wondering why this is important, the Chronicle explains:  “Businesses and employment lawyers have been following the case closely, anticipating that it would resolve the disagreement between state and federal courts on the meaning of the California law. Federal courts are likely to fall in line now that California’s highest court has interpreted the law.” And if the federal courts follow California’s lead, this ruling will quickly spread across the country and be applicable to every workplace in every state.

“Both California employers and employees are winners in this case,” said attorneys James Pooley and David Murphy, partners in the trade secrets and unfair competition litigation practice at Morrison & Foerster.  “The court’s decision was correct both as a matter of law and public policy. California will continue to have a high-velocity labor market, with the type of high employee mobility that many economists and social scientists believe has fueled its high level of technological innovation.”

To put that in non-attorney English, the court’s decision is good for both workers and the businesses that employ them because it removes a barrier limiting the ability of workers to freely move in the labor market–a restriction that might limit future innovation and job growth in California’s large and ever-changing economy.

Here’s my take: I’ve always thought that noncompete agreements were the province of paranoid, small-minded executives. I worked for at least one who has to be frothing at the mouth over this. He loved to bully workers and threaten them about taking his “trade secrets” to someone else.

His problem, however, was that he had nothing worth taking. There was no secret sauce, no combination of 11 herbs and spices for workers to take across the street. He had nothing to lose then, and with this California Supreme Court ruling, one fewer thing to bully his workers about now.

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Expat Workers Face Headaches Shipping Goods

In the recent past, a corporate employee relocating to Europe could expect to get household belongings shipped to the new location in about six weeks. But because of a shortage of shipping containers, it takes twice as long these days, and the process can sometimes drag on for up to six months.

    Coming home is no fun either. Containers of household belongings are high on the list of potentially suspicious cargo subject to search by U.S. Customs. Containers packed by household movers get opened, examined and then re­packed by dock workers, who are not known for their delicacy. Employees relocating to the U.S. have had their household goods mangled in the new era of heightened security.


    “If you saw some of these containers that were examined, the contents look like they have been put back in with a bulldozer,” says Boris Populoh, director of programs and education at the Household Goods Forwarders Association of America, based in Alexandria, Virginia.


    Populoh relates one recent case in which a household container was shipped with a few pieces of carefully crated and stowed rare art along with furnishings. The container was unpacked, inspected and repacked at a U.S. port. The loose art was then put at the bottom of the container, and chairs, tables and other furniture were tossed on top.


    While problems in shipping goods haven’t slowed down international relocations, which several surveys indicate are on the rise, the issues have caused headaches for employees moving out of and into the U.S. on assignments.


    “It is a logistical nightmare,” says Earl Lee, president of Prudential Relocation.


    The shipment of household goods out of the United States has run up against the weak U.S. dollar, which has made U.S. products more competitive worldwide. As a result, U.S. exports are rising. Empty containers that used to stack up at the Port of Long Beach in California waiting to return to China or elsewhere in Asia now are being snatched up by American manufacturers. Even farmers have started getting into the act, piling grain into containers for shipment overseas. The resulting shortage of containers is compounded by a shortage of space on ships.


    “If you can find a container, you are having trouble getting it onto a ship,” says Thomas Wei­mer, who directs global transportation for Prudential Relocation.


    When the dollar was high and international trade was mostly heading into the U.S., relocation companies had the luxury of ordering up a container and reserving space on a ship with no advance notice.


    “We used to refer to transportation on the international side as a limitless commodity,” says Greg Hoover, president and COO of Atlas Van Lines. “These days you have to book three to four months in advance. Some companies reserve space on speculation.”


    The tight shipping market, coupled with rising fuel prices, has doubled the cost of shipping household goods internationally, Populoh says.


    Getting goods back to the U.S. has its own challenges. Thanks to heightened security, house­hold goods shipped through U.S. ports are often searched. The first step is an X-ray of the packed container. Because household goods packed in containers can be difficult to positively identify, officials often require that the containers be opened so everything inside can be examined.


    “There is a much higher likelihood that a house­hold container will be pulled aside than other containers,” Populoh says. The situation affects not just returning Americans but also foreigners taking up job assignments in the United States. The situation has become bad enough for Populoh’s association to appeal to Congress for help—so far without much success.


    “What we have been trying to tell members of Congress is that this could directly affect the competitiveness of the U.S.” he says.


Workforce Management, August 11, 2008, p. 34 — Subscribe Now!

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Home Depot 401(k) Participants Can Sue, Court Rules

A lawsuit that 401(k) participants filed against Home Depot and former executives—including Robert Nardelli and Ken Langone—has been given new life.


The suit, which was dismissed in district court, has now been revived by an appeals court ruling that asserted participants may sue the company to recover losses that were sustained from holding Home Depot stock in their 401(k) plans.


“It looks like we’ll have our day in court now,” said Robert Harwood, attorney for the plaintiffs in the class-action suit, which was led by former employee Raymond Lanfear, a Colorado resident. “We think the appeals court made the right decision.”


But before the suit can go back to the district court, the workers have to file an administrative appeal with the retirement committee at Home Depot, noted Ron DeFeo, a spokesman for the company.


“We’re pleased with this decision,” he said.


The district court had stated that the former employees leading the suit did not qualify as plan participants and dismissed the case, in part, for lack of subject-matter jurisdiction as a result. Technically, the district court argued, the former employees were suing to recover damages, not benefits—a ruling the appeals court stated was erroneous.


In the original complaint, the suit alleged that Home Depot and several of its executives breached their fiduciary duties to 401(k) participants by “failing to prudently and loyally manage the Plan’s investment in Home Depot Stock.” Specifically, the plaintiffs argued that the company’s stock was an imprudent investment option for plan participants after Home Depot’s share price began to decline in June 2001.


The former employees also contended that company contributions to the 401(k) should not have been made with Home Depot stock after this time, when shares of Home Depot were trading at roughly $50. By January 2003, the company’s stock had dipped below $21.


The former employees also argued that the decline began and occurred throughout a period when several of Home Depot’s top executives were improperly backdating their stock option grants—a charge that the company admitted to in 2006. The litigants claim the backdating played a role in further deflating the value of the company’s stock.

Filed by Mark Bruno of Financial Week, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com

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Raise Age for Full Social Security Benefits, Actuaries Urge

The age at which workers can receive full Social Security benefits should be increased to help reduce the looming insolvency of the system, according to the American Academy of Actuaries.


“The sooner policymakers act, the more options they will have,” Thomas Terry, vice president of the Washington-based academy and chairman of its Pension Practice Council, said at a press conference Monday, August 4.


He is also chief executive of JPMorgan Compensation and Benefit Strategies, a unit of JPMorgan Chase & Co. of New York.


Tax increases could be phased in more gradually, and reductions in benefit growth could be spread across a much larger population, Terry said.


The academy suggested three proposals for increasing the retirement age.


In one plan, the age at which full benefits could be received would be raised to 67 for all workers born in 1949 or later, which would reduce the expected deficit by 10 percent.


The second plan would increase the full-benefits age to 67 and increase it by a month every two years until it hit 70, thus eliminating 35 percent of the expected long-range deficit.


The third option would increase the schedule for full benefits by two months every year until age 70, eliminating half of the long-range deficit, the academy said.


The system is expected to have cash flow problems beginning in 2017, and the Social Security trust fund will be exhausted by 2041 at the current rate, the academy said.


Filed by Sara Hansard of Investment News, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.

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Appeals Court Upholds Tort Reform Ruling

An appeals court panel has upheld a lower court’s ruling that a so-called mass action can be moved to a federal court from a state court under the federal Class Action Fairness Act, even if a group of plaintiffs deny that their action is a mass action.


In the Chicago-based 7th U.S. Circuit Court of Appeals on Friday, August 1, opinion in Bullard et al. v. Burlington Northern Santa Fe Railway Co. et al., Chief Judge Frank Easterbrook noted that under the Class Action Fairness Act, a mass action can be sent to federal court if the plaintiffs propose a trial involving the claims of at least 100 litigants, if at least one plaintiff seeks at least $75,000, if the stakes as a whole are more than $5 million and if the parties involved are from different states.


The plaintiffs in the case—144 people seeking damages from Burlington Northern and three other defendants that allegedly allowed dangerous chemicals to escape from a wood-processing plant—sought to have the case tried in Cook County, Illinois, circuit court. The defendants, citing the Class Action Fairness Act, sought to have the case heard in the U.S. District Court for the Northern District of Illinois. The plaintiffs said the case should be moved back to state court because their suit was not a mass action.


The plaintiffs “insist that a complaint never proposes a trial,” wrote Easterbrook. “According to the plaintiffs, defendants may remove a ‘mass action’ only on the eve of a trial, once a final pretrial order or equivalent document identifies the number of parties to a trial.”


The district court denied the plaintiffs’ motion, and the appeals court affirmed that ruling, with Easterbrook noting that the appeals court took the case because the legal issue had never been addressed in any federal circuit court. He wrote that the lower court’s “conclusion is the only sensible reading” of the statute.


The plaintiffs argued that “no mass action could ever be a class action, for a suit cannot be identified as a ‘mass action’ until close to trial, while a suit is a class action or not,” under the relevant section of CAFA, “on the date of filing,” wrote Easterbrook. “Courts do not read statutes to make entire subsections vanish into the night.”


Filed by Mark A. Hofmann of Business Insurance, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.

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Big Companies Divulging More Information About Compensation Consultants

As lawmakers shine a light on possible conflicts of interest among compensation consultants, large companies appear to be going out of their way to disclose more information about their relationships with these firms. In some cases, corporations are even replacing their longstanding comp consultants with independent firms.


These moves, which are being made in part to pre-empt any potentially sticky scenarios—such as shareholder lawsuits or regulatory action—have been tracked in a small sampling by the Corporate Library. The watchdog looked at the filings of nine companies—AT&T, Hewlett-Packard, Home Depot, Merck, Pfizer, Safeway, Time Warner, Verizon and Wal-Mart—and found that during the past two years, most of these companies began to disclose much more information about their compensation consultants than regulators require.


Rather than merely identifying their compensation consultants in proxy filings, the corporations are also revealing whether these advisors provide any other services to the company. Some are also outlining the fees paid to compensation consultants for their services.


“They’re going above and beyond the minimum, that’s without question,” said Paul Hodgson, senior research associate at the Corporate Library. “It shows shareholders that they’re conscious of the potential for conflicts.”


Verizon, for example, now has a formal policy on compensation consultants that prevents such firms from doing any work for the telecom company other than advising its compensation committee.


Hodgson noted that this policy comes after a 2006 New York Times report revealed that Verizon’s former compensation consultant, Hewitt Associates, also provided the company with extensive—and lucrative—benefits consulting.


In fact, Verizon recently disclosed that it had switched from using Hewitt as its compensation consultant in favor of Pearl Meyer & Partners. Safeway, too, recently changed consultants, replacing Towers Perrin with Frederick Cook & Co.


Other companies, such as Hewlett-Packard and Pfizer, also noted that their board’s compensation consultants do not perform any other work for the company. Time Warner and Merck disclosed that their compensation consultants do provide the companies with other services, but added that they now have formal policies aimed at preventing any conflicts of interest.


At the same time, Home Depot revealed that it uses Towers Perrin as its comp consultant and relies on a subsidiary of the firm, Tillinghast, for its insurance and risk management services. But Home Depot also noted that the revenue Tillinghast generates from this assignment is well below 2 percent of Towers Perrin’s total gross revenue—the threshold that Home Depot uses to determine a consultant’s independence, according to the Corporate Library.



iled by Mark Bruno of Financial Week, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.

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Employers Unlocking Health Care Expertise

In the continuing battle against rising health care costs, some employers are finding they can best help themselves by helping others.


Increasingly, employers are engaging with local providers, inviting outsiders to take part in their on-site health fairs or investing in health information technology and health improvement research projects.


While much of this collaborative work is being performed in conjunction with local business health coalitions, in some cases individual employers are breaking free from the pack and taking leading roles.


Dr. Michael Cryer, senior medical director at Hewitt Associates in Woodlands, Texas, likens the phenomenon to years ago when large industrial employers began investing in school science programs because “they knew they were educating their future workforce.”


Working with the community on health care consumerism can also help inform current and future employees. Some employer efforts, such as doctor and hospital report cards, are intended to foster consumerism on a communitywide basis, suggests Dr. Charles Smith, a principal at Towers Perrin in New York.


“Then if they come to work for that employer, they will already have a certain level of knowledge” about how to be a better health care consumer, he says.


Indeed, “the degree to which employers can promote community health, and a culture of health in the communities where they operate, that’s good for business,” says Andrew Webber, president of the National Business Coalition on Health in Washington.


“An employer can obviously do a lot at the workplace to promote healthy behavior,” he says, but they have little or no influence over how their employees act once they enter the community at large. As such, “we are definitely encouraging our coalitions and the employer members of our coalitions to get more involved in community health.”


“This is the pool, the community, from which they draw not only their current workforce, but their future workforce,” Webber says. “And employers’ No. 1 goal is to have healthy and productive workers.”


As part of this effort, the National Business Coalition on Health recently entered into a five-year cooperative agreement with the Centers for Disease Control and Prevention in Atlanta to pair member coalitions with public health agencies so they can collaborate on community health initiatives, Webber says.


The Florida Health Care Coalition in Miami hosts communitywide health fairs. Other employers have also teamed up to improve the health care delivery system.


“It’s not just for the employees of members of the coalition. The coalition is trying to do health fairs that can impact the community at large,” Webber says.


“In community after community, business coalitions are working with physician groups, with hospitals, with consumer and labor groups to try and improve quality in their community,” says Peter Lee, executive director of health policy at the Pacific Business Group on Health in San Francisco.


Those efforts are anchored in the understanding that providers don’t discriminate in how they deliver care based on who an individual works for, he explained.


“If you go to a hospital and get a surgical-site infection, someone doesn’t say, ‘Excuse me, we’re going to make sure the Chevron employees don’t get infections, but the rest of you, we don’t really care about,’ ” Lee says.


“You can’t really address the affordability and quality issues for an individual employer without addressing it for the entire system,” he says.


A government program spearheaded by Secretary of Health and Human Services Michael Leavitt is also encouraging more employers to become involved in community health improvement efforts via the Chartered Value Exchange program, which enables them to gain access to performance information from Medicare that gauges how well physicians treat patients.


“Those community efforts have to have, by definition, the employer community at the table,” Lee notes.


Likewise, the Robert Wood Johnson Foundation, a Washington-based philanthropic organization that focuses on health care issues, is requiring major employer involvement in order for a community to qualify for grants totaling $300 million under its Aligning Forces for Quality program, Lee says.


“To really have improvement throughout a community, everyone has to be at the table. For many years, business coalitions in some ways have been at the cutting edge of these efforts, but now I think we’re seeing a real growth in really robust collaboration,” he says.


But sometimes it takes the driving force of an individual employer to give these efforts the spark needed to get started, Lee says, pointing to an effort led by Caterpillar Inc. in Peoria, Illinois, as an example.


In 2006, Caterpillar joined forces with Peoria-based OSF Healthcare System, which operates seven acute care facilities, to form the state’s first regional health care improvement coalition, Quality Quest for Health.


Since Caterpillar and OSF are the region’s two largest employers, providing coverage to a substantial number of individuals living in the community either as employees, retirees or their dependents, the two organizations realized they could have a significant impact on the region if they worked together.


“Quality Quest for Health’s mission is to achieve exceptional patient service and outcomes by serving as a catalyst health care transformation,” says Dr. Gail Amundson, president and CEO of the coalition.


The program’s initial focus was on increasing the affordability of medications by boosting generic prescribing rates among local providers, implementing preventive care treatment guidelines developed by the Institute for Clinical Systems Improvement, and improving the quality of colorectal cancer screenings performed in the community, Amundson says.


This year, the alliance is also working on reducing secondary cardiovascular risks by helping people with heart disease and diabetes better manage their conditions and collecting data on healthy lifestyles using the health risk assessment that more than 90 percent of Caterpillar’s employees complete twice each year, she says.


Although Caterpillar will be the primary beneficiary of its work in the Peoria area, there may be another reason why employers like it are reaching out into their communities rather than keeping to themselves, suggests Bruce Kelley, a senior group health care consultant at Watson Wyatt Worldwide in Minneapolis.


“If the big employers just used their power to achieve a specific cost reduction they desire, they would likely experience backlash from the much larger number of smaller employers that do not have that market power,” he says. “So they’re not doing it for altruism’s sake.”


But even if employers’ motives are not purely selfless, “there has to be a champion” in the community for any significant change to occur, says Debra Draper, associate director at the Center for Studying Health System Change in Washington.


“The time of employers keeping to themselves has passed. They have to become more of a community citizen. There are real synergies when they work collectively with health plans, providers and other employers. Everyone’s got ownership and has a role in improving health care,” says Webber of the National Business Coalition on Health.

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Employers Seek to Gain From Weight-Loss Surgery

No sooner had Jeff Shovlin become vice president of benefits at Harrah’s Entertainment in Las Vegas four years ago than he began receiving a regular stream of questions from employees about one topic: Why was the company refusing to pay for weight-loss surgery?


Shovlin made some inquiries. Gastric bypass costs on average $25,000 and gastric banding totals around $17,000, according to the American Society for Metabolic and Bariatric Surgery, an industry group based in Gainesville, Florida. He found the price tag for bariatric surgery prohibitive, especially since the surgery’s cost was often compounded by medical complications.


“The more research we did, the more we felt the jury was still out in terms of the value proposition of the surgery,” Shovlin says.


In 2006, though, the company acquired Caesars Entertainment, and Shovlin changed his mind. Caesars already had a successful program to cover bariatric surgery, which required patients to follow strict guidelines. Shovlin says employees avoided complications and returned to work transformed. That’s when he decided to expand coverage of weight-loss surgery to all of the company’s 40,000 employees and 40,000 dependents.


“We looked at our claims cost and we looked at the overall health of our workforce,” Shovlin says. “Most of the health risk factors we saw were either directly or indirectly caused by obesity or people [who] were flat-out overweight.”


With six in 10 American adults overweight or obese, benefit managers are desperately looking for ways to save money on the long-term costs associated with obesity-related diseases such as heart failure, high blood pressure and diabetes.


Once considered too experimental to cover, weight-loss surgery is cautiously being embraced by employers who believe that paying for the surgery may be worth its high initial cost. New data showing dramatic health benefits for people who successfully undergo weight-loss surgery, as well as protocols designed to reduce complications, may make it a worthwhile investment, experts say.


In one dramatic example, a study of weight-loss surgery published this year in The Journal of the American Medical Association showed that 73 percent of people with Type 2 diabetes had complete remission of the disease after weight-loss surgery, compared with the 13 percent of patients who only tried conventional medicines, changing their diet and exercising.


Shovlin says he has noticed an appreciable difference in the health of the 100 or so employees who have undergone the surgery since the policy to cover it was put into place in 2007.


“Almost immediately, after the surgery, if someone was diabetic or pre-diabetic, that risk factor was reduced or went away completely,” he says.


Whether the surgery will be cost-effective, though, depends largely on whether the patient experiences complications, says Steve Nyce, a senior research associate at Watson Wyatt Worldwide.


Nyce, who will soon publish a study on the cost-effectiveness of the surgery, says problems that can accompany such procedures may be avoided by requiring patients to undergo the surgery at a center of excellence, a requirement established by the Centers for Medicaid and Medicare when it began covering the surgery for qualifying patients in 2006.


Centers of excellence are surgery centers in hospitals that perform the most common weight-loss surgeries at least 125 times a year. Surgeons must have performed at least 125 surgeries overall and at least 50 surgeries a year.


In the U.S., 339 hospitals with 589 surgeons have been designated as centers of excellence. More than 400 hospitals and 700 surgeons are in the application process, according to the American Society for Metabolic and Bariatric Surgery.


The Centers for Medicare and Medicaid Services covers the surgery for people with a body mass index of greater than 35 and at least one other health condition. (A person with a body mass index of greater than 25 is considered overweight; someone with greater than 30 is considered obese.)


Before they agree to cover such surgeries, health plans are increasingly requiring patients to go to centers of excellence as well as first enrolling in a weight-loss program, says Debra Draper, associate director at the Center for Studying Health System Change.


“There is concern that there is overutilization,” Draper says. “The surgery is seen as a last resort.”


At Harrah’s, for example, an employee must follow a weight-loss program, lose weight and change his diet before getting the surgery. Afterward, the patient must attend post-surgical counseling to keep the weight off and remain healthy. Shovlin says none of his employees has experienced any major complications.


Based on preliminary data from his analysis of 40 employers that cover bariatric surgeries, Nyce says he has discovered two conflicting scenarios.


The first is the good news: Median health care costs of patients who underwent bariatric surgery dropped 30 percent per member per month after surgery, to $350 a month from $500.


The bad news: Those savings, on average, were negated because of a small handful of complications from surgery.


“There are going to be a number [of people who get the surgery] that benefit greatly. There’s a certain percentage that will cost quite a bundle,” Nyce says. “All said, it ends up not being cost-effective on the average, because you have a few cases that are quite high-cost.”


Most weight-loss surgeries reduce the size of the stomach to generate a sense of fullness after eating a small amount of food. The most common complications are feelings of nausea, vomiting and cold sweats that result from digesting too much food or eating too quickly. More serious complications can include ulcers that form when the intestine is reattached to the stomach, a complication that can sometimes be attributable to the skill level of a surgeon.


Nyce says 18 percent of the patients whose surgeries he studied experienced complications during the initial hospital stay, according to his preliminary data. In the 12 months after discharge, complications rose to 48 percent. He says those who had complications were more likely to have had other health problems before the surgery.


“When you have more health issues, more things can go wrong,” Nyce says.


He has not yet been able to study the cost-effectiveness of the surgery on health care five or even 10 years down the road. Such data could help employers decide whether covering the surgery leads to dramatic long-term cost savings.


Still, Nyce believes that as complication rates decrease, more employers will cover bariatric surgery at centers of excellence for qualified patients who meet weight guidelines and make an effort to change their diet and to exercise.


“My recommendation,” he says, “is to certainly realize, if you are going to cover it, that these restrictions are important.”

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Building a Better 401(k)

E verybody wants it. Nobody has it. It may not even exist. Not yet, at least. It’s the Perfect 401(k)—a plan in which every worker participates, saves at adequate levels, and invests simply, appropriately and inexpensively along the way to retirement.


The Perfect Plan emphasizes not only saving for retirement but also the process of properly withdrawing from a 401(k), so workers don’t outlive the savings they’ve spent 30 to 40 years accumulating.


It’s a plan that, if done right, is more than just a compelling retirement benefit—it’s a competitive weapon, one that helps lure and retain key talent and serves as an underlying driver of productivity and profitability.


Some companies just don’t get this—and perhaps never will. Yet there are employers teetering on the brink of perfection. At these companies, it’s not just about adding the latest bells and whistles. (Just about any defined-contribution plan sponsor can flip the switch on automatic enrollment, for instance, and increase employee participation rates overnight.) Financial Week has identified companies that have a real plan behind their plans; together, they suggest a blueprint for the Perfect 401(k)—and a glimpse at the future of corporate retirement benefits for everyone.


There will be 100 percent participation—through real financial planning advice for workers
    Most benefits officers would view having 83 percent of employees participating in the company’s 401(k) plan as a job well done. But to Annette Grabow, manager of retirement benefits at construction company M.A. Mortenson, it’s troubling.


“It means there are 200 people here who aren’t saving in our plan,” says Grabow, who oversees the $107 million 401(k) plan the Minneapolis company offers to its 1,300 employees. “And that just doesn’t work for me.”


Grabow wants every employee participating. That’s right: every one of them. As part of a statewide personal finance initiative undertaken by Minnesota’s largest employers, she recently pledged to have 100 percent of her employees contributing to the Mortenson 401(k) by the end of 2009. And even though Mortenson’s employees contribute an admirable average of about 8 percent of their pay to the 401(k), Grabow wants to boost that number too.


Lofty goals, but with the way the company’s 401(k) education programs have worked in the past, Grabow insists, anything is possible. “If I would have set my goal at 99 percent participation, then I would have been OK with settling for 98 percent,” she says. “But I couldn’t accept anything less than 100 percent, as aggressive as it may seem.”


Mortenson could have chosen to add an automatic enrollment feature and hit Grabow’s goal overnight. But she’d rather educate and encourage employees to opt in, proactively save for retirement and choose their own investments: “Auto-everything is the easy way out. But it doesn’t relieve you of your responsibility to educate.”


That means Grabow must always be talking to employees about the 401(k), in a number of formats, but without being intrusive—or worse, forgettable.


There’s the annual benefits road show, for which Grabow and other Mortenson executives organize speakers and workshops to get employees thinking about their financial future. (The company is careful not to use the word “retirement” too much, because it may not resonate well with some of its younger workers.) They talk about the basics, such as why employees can afford to participate in a 401(k) even if they’re inclined to think they can’t. And they talk about saving for retirement in a broader context than 401(k)s. “After all, it’s part of a financial planning process,” Grabow notes. “You need to get them to think about creating and living on a budget.”


There are other subtle, year-round reminders on Mortenson’s intranet, such as videos of management discussing the benefits of the company’s 401(k). There’s a video game given to new hires that’s aimed at teaching young workers about making the right “life choices,” including the need to start saving for their retirement—ahem, the future—at an early age.


Work-site materials, including the inevitable poster campaigns, are reinforced as frequently as once a quarter by postcards and packages sent to employees’ homes. The company drums up new messages and themes at least once a year to keep existing participants engaged, while also attempting to attract the attention of nonparticipants. “It has to be slick,” Grabow says. “It’s marketing, make no mistake about it, and there’s a lot of competition for your employees’ attention.”


Case in point: Later this year, the company will send customized boxes to the homes of employees who don’t participate in the 401(k). Letters end up in the garbage, Grabow says, but everyone likes a package. Inside, workers will find rubber ducks dressed in construction outfits to remind them “they don’t want to be the odd ducks not in the 401(k) plan.”


Goofy? Sure. But whether it’s shtick or slick doesn’t matter when you’re trying to get through to every last employee. “It’s an ongoing process,” Grabow says. “You don’t just stop because most of your people participate—it’s a challenge, but you have to keep pushing until you find a way to communicate with everyone.”


Most companies should have such problems.


There will be a generous employer match—made in cash, not stock
    To hear Frank Rudolph tell it, a retirement plan in the energy industry isn’t just a perfunctory benefit anymore—it has become a necessity. And not just for the employees, but for the companies themselves, which are competing for talent when demand is at an all-time high and qualified candidates are in considerably shorter supply.


“With oil hovering at about $130 a barrel, the pressure is on us to be as productive as possible,” says Rudolph, senior vice president of human resources at Devon Energy, an oil and gas firm. “And we’re in need of every engineer and every physicist available right now.”


Complicating things further for Devon: It’s also staring at a massive wave of retirements over the next several years, with roughly half its 5,200 workers expected to hang up their spurs during the next decade.


So Devon has decided to use its benefits platform to do battle in the war for talent against the likes of Shell and Chevron. At the forefront of its fight is a 401(k) plan that boasts a company match on steroids, one that’s more than just a perk or a marginally competitive benefit—the size of Devon’s match puts it in a league of its own.


The company matches employees’ contributions dollar for dollar—that’s with actual cash, too, not company stock. The even match is a bit of a rarity in corporate America, as only about 20 percent of employers offer it, according to the Profit Sharing/401(k) Council of America. But Devon’s matching also climbs with a worker’s tenure. For employees with up to five years of service, the company provides a match for 401(k) contributions equal to up to 11 percent of employees’ annual pay. For those with five to nine years, it matches up to 14 percent, and workers with 10 to 14 years get a match of up to 18 percent. Employees who have been with Devon for 15 years or more get a matching contribution of up to 22 percent of annual pay.


To put that in context, the most common match is 50 cents on each dollar up to the first 6 percent of pay, according to the Profit Sharing/401(k) Council.


So at most other companies, a new hire who earns $50,000 a year and contributes 6 percent of that to the 401(k) would be saving $3,000 a year if she maxed out the company’s match—plus $1,500 more coming from the employer, using the typical match.


At Devon, this same worker would be saving $11,000 a year—with $5,500 of that coming from Devon—if she contributed enough to receive the full company match.


“A new hire does consider it part of his or her compensation, too, which also helps from a competitive perspective,” Rudolph says. New hires are subject to a vesting schedule of 20 percent a year and become fully vested in Devon’s 401(k) after five years.


“When I’m out at the college campuses recruiting now, many candidates are comparing our offerings to our competitors’ and state how much these benefits actually mean to them,” Rudolph says. “They can take a quick pen to it and see the difference right away.”


The megamatch wasn’t put in place just to help Devon recruit, however. Last year the company gave its employees the option of sticking with the traditional pension or moving into the super-401(k), which it dubbed Portfolio Two. Like many other companies, Devon was phasing out its traditional pension because it became too costly to maintain and threatened to bring too much volatility to the balance sheet. “Recruiting and retention played a big part,” Rudolph says, “but we also wanted to do the right thing for our employees.”


The matching program was designed to give those workers who opted for the 401(k) a defined-contribution retirement plan whose value was equal to that of the defined-benefit option. “We spent a lot of time calculating the numbers for these contribution levels,” Rudolph says. “We didn’t want to create two tiers of employees.”


It’s not surprising that Devon has 87 percent of its workforce participating in the 401(k)—with the bulk of the participants made up of its younger workers. The company may be well on its way to alleviating the generation gap that has shaped its workforce while also adding to its competitiveness in the near term.


There will be easy-to-use target-date funds with rock-bottom fees
    Back in 2003—during the pre-Pension Protection Act era in which every 401(k) participant fended for him- or herself—Intel was in the early stages of revamping its 401(k) plan when, suddenly, the proverbial light bulb went on.


“But we started taking a hard look at what we could do to make the plan more attractive to our employees who were still sitting on the sidelines,” says Fred Thiele, manager of global retirement benefits at Intel. “Just offering the standard host of fund options, without any particular order to them, left a lot of people feeling fearful of the investment side of things. And that kept a lot of people from opting in.”


That’s when Intel elected to build its own set of customized target-date funds—several years before mutual fund companies began flooding the corporate retirement and retail investor market with hundreds of them—to help appeal to those timid employees.


To construct the new “life-stage” offerings, Intel’s retirement team packaged the core funds that were already available to employees, using an asset allocation that was based on a participant’s estimated retirement date. Intel also created a glide path that would reallocate and rebalance participants’ assets over time, as they grew older and approached retirement.


For instance, an employee who will retire around 2045 would start out in an Intel life-stage fund that holds 90 percent equities and 10 percent fixed income. By the time he hits that retirement date, the portfolio is an even split of stocks and bonds.


“We don’t give investment advice for obvious reasons,” Thiele says. “But it’s a yardstick, and it’s a way to ‘DB-ize’ the 401(k) plan, so employees have some of the same advantages they would have had with a traditional [defined-benefit] pension.”


Perhaps nowhere are these advantages more evident than in the pricing of Intel’s life-stage funds—hardly a passing point, considering that more than a dozen large companies are fighting off lawsuits from 401(k) participants charging that fund fees were excessive.


With $4 billion in its plans, Intel has plenty of leverage when it’s negotiating with fund managers eager to take on a piece of its growing pool of assets. And because Intel isn’t looking to profit off of the life-stage funds, it needn’t charge any packaging fee on top of already-low fees on the underlying institutional funds used to build the life-stage offerings.


Add all of this up, and Intel’s participants are paying 0.06 percent to 0.11 percent of assets a year for one of its life-stage funds—a pittance compared with the average 0.62 percent that 401(k) participants in other companies pay for target-date funds, according to Hewitt Associates.


“You see the power in how much money is going into these funds, so you can work the expense ratios down if you have the scale and resources,” Thiele says.


Intel is now halfway toward reaching its participation goal. About 80 percent of its 45,000 U.S. employees are contributing to the 401(k), up from around 70 percent five years ago, but it wants to get that number closer to 90 percent in the near future. The life-stage funds played a big part in luring some of the nonparticipants into the plan, Thiele says, but the funds have also appealed to many employees who already participated but wanted a simpler option than independently managing their investments.


“We’re in an era now where employees are becoming more and more responsible for their own retirements,” Thiele says. “So we feel we have to do whatever we can do to get as many people into the plan as possible, and provide them with enough tools so they can get themselves to, and through, retirement without any issues.”


There will be a decent annuity option to help retirees cash out wisely
    When your company sponsors a $50 billion defined-benefit plan and a $30 billion 401(k), there’s no such thing as a small decision when changes have to be made to retirement benefits.


So when IBM chose to freeze its DB plan to new hires a few years ago and steer them into an expanded 401(k) starting this year—a move that will save the company $3 billion by 2010—it carefully considered every bell and whistle added to the new 401(k). There are the auto-everything features, such as automatic enrollment, automatic company contributions and automatic savings options. Then there are custom target-date funds and free education and financial advice tools that IBM now makes available to its participants, all aimed at getting employees on track to save enough for retirement.


But there’s another significant, although slightly less central, feature in the IBM plan that may soon be getting some play with other large plan sponsors: an IRA annuity option.


Of all the decisions IBM officials made in designing the new 401(k), “adding the annuity was the easy one,” says Jesse Greene, vice president of financial management at the technology titan.


Most companies have a tough enough time just getting their employees to think about saving for retirement, so getting them to consider how to properly withdraw funds from their 401(k) accounts can draw a lot of blank stares. But with more than 70 million Americans set to retire over the next decade, the concept of “decumulation” is becoming a much more relevant topic for plan sponsors and participants alike.


“When companies started offering defined-benefit plans in the 1950s, people didn’t live that long,” Greene says. “Now longevity is a major issue for employers and employees.”


IBM officials believed it was critical to have an annuity option for 401(k) participants to help them preserve their savings all the way through retirement—even if they live into their 80s and 90s, Greene says. “People are losing the DB option, but we felt we needed to provide them with something that offers the same kind of protection against longevity as a traditional pension.”


That’s when IBM elected to tap Hueler Investment Services, a Minneapolis firm that takes a different—and low-cost—approach to annuity programs.


While annuities have been part of plan options in 401(k)s for years, they haven’t had much appeal for participants for a number of reasons, says David Wray, president of the Profit Sharing/401(k) Council, adding that only 1 percent of participants annuitize part of their retirement savings through their employers.


One of the barriers has been cost, with annuities carrying fees that can run from 4 percent of assets all the way up to 13 percent in some extreme instances, Wray notes.


There also are hurdles a company must clear just to offer an annuity as a plan option in a 401(k). “The consequences for being noncompliant can carry significant fines,” he says, “so much so that a good number of employers have been pulling annuities as plan options.”


Hueler’s program offers annuities as an individual retirement account option, however, instead of a traditional plan option, and allows participants to roll over their 401(k) assets into a range of annuities, such as fixed-income or inflation-protected annuities. Because employees acquire the annuities in an IRA, rather than within the 401(k), the program circumvents compliance issues and gives sponsors a headache-free way of providing plan participants with annuities.


Kelli Hueler, president and founder of Hueler Investments, says that although IBM was one of the first companies to tap her firm for this annuity option, more corporate plan sponsors have begun to warm to the idea of adding Hueler’s annuities offering to their 401(k)s to “pensionize” participants’ retirement assets.


“Typically, there hasn’t been a lot of flexibility for participants with the standard annuity options in their plans, and so they haven’t had a lot of success with participants or sponsors,” she says.


Hueler’s program allows participants to annuitize as much or as little of their 401(k) assets as they choose. “It’s been an all-or-nothing approach in most cases,” she says. “And that’s not a palatable decision for most participants—you’re essentially asking them to make a lifelong decision, at a single point in time, to annuitize their entire portfolio, or nothing at all.”


Pricing is another plus for the Hueler program. It offers group rather than retail pricing. It also pits insurers against one another in a competitive bidding process for an annuity contract, another way to ensure a participant isn’t being overcharged. And Hueler doesn’t take a fee from the insurers, which also keeps customers’ costs relatively low. Hueler says her fees generally range from 1 percent to 2 percent of the assets that are being annuitized—a far cry from the 5 percent to 6 percent that typical retail annuities carry.


All of this resonated with IBM, Greene says, because it’s in tune with the company’s modus operandi for offering retirement benefits. “Our philosophy has always been to provide valuable choices that are low-cost,” he says, adding that IBM 401(k) participants don’t pay more than 10 basis points for their entire portfolio to be managed. “Fees just eat away at retirement income, and that’s counterintuitive to the whole process.”


There will be additional tax breaks on savings through a Roth 401(k)
    There aren’t many things a company like Demco—a small supplier of library furniture and equipment in Madison, Wisconsin—has in common with Intel, IBM and General Motors, with their tens of thousands of workers and billions of dollars in retirement assets.


With about 250 employees and roughly $30 million in retirement assets, Demco does, however, boast one of the same best-of-breed benefits that some of the nation’s largest employers have been rolling out to their massive workforces in recent years: a Roth contribution component for its 401(k) plan.


“It’s a different tax play, and you’re giving people a choice about when they pay taxes on a major piece of their future retirement income,” says Don Rogers, CFO at Demco. “We thought it was a good option before we added it to the plan a few years ago. Our employees obviously now think that, too.”


Almost half of the company’s employees now make Roth contributions to the company’s 401(k), which Demco offers in addition to a profit-sharing plan, Rogers says.


Since the Internal Revenue Service gave the go-ahead for participants to make Roth contributions to 401(k) plans beginning in 2006, the feature has had some real appeal for a number of corporate plan sponsors, like Demco, and continues to gain favor.


In just the past two years, roughly one out of every five corporate plan sponsors has added a Roth option, which allows employees to make after-tax contributions to their 401(k)s. Unlike traditional 401(k) deferrals that workers make using pretax dollars, participants will not be taxed when they withdraw their Roth contributions—as well as the investment returns they’ve earned on these contributions—for their retirement.


The Roth’s proposition is simple: Pay now, have later. And that’s exactly why more and more employers are considering adding a Roth feature to their 401(k)s and why it will probably be a staple in many plans in the not-too-distant future, says Gary Gross, executive director of Grant Thornton’s compensation and benefits practice.


About a quarter of the companies that don’t currently offer the Roth option are considering adding such a feature this year, according to a recent poll by Grant Thornton. An additional 60 percent of plan sponsors said they are contemplating adding a Roth 401(k) at some point in the near future but didn’t offer a specific timetable.


One of the things keeping some employers from offering a Roth option is that it adds to the already long list of decisions that employees have to make about their 401(k) plans and retirement savings, Gross says. “The Roth is a great option, but it may not be right for everyone.”


With the Roth, participants are essentially prepaying the taxes on their retirement income and giving up some of the short-term benefits they would get from making pretax contributions to a traditional 401(k), like lowering their annual taxable income. So participants need to consider their current tax position before opting for the Roth, Gross says. For example, Roth contributions might be most appropriate for workers who are currently in a low tax bracket but think they may pay higher taxes in retirement.


“It’s a bet on your tax situation,” he says. “And communicating this to your employees can be a real challenge.”


But some companies, like Intel, do what they can to help employees make these difficult decisions. “You can’t just offer it without decision-support tools,” says the company’s Thiele.


Intel has calculators on its company intranet that allow participants to perform a relatively easy side-by-side comparison of Roth and traditional 401(k) savings.


“They can run the numbers and decide what’s right for them,” Thiele says. “It may not be for every employee, but in a comprehensive 401(k) fund the goal is: Leave it up to participants to decide what might be in their best interests.”

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Workers’ Compensation Insurer Must Pay for Gastric Bypass Surgery

An obese worker’s gastric bypass surgery is compensable under Oregon’s workers’ compensation law because the procedure was necessary to treat a job-related knee injury, an appeals court ruled Wednesday, July 30.


The ruling in SAIF Corp. and Jerry’s Specialized Sales v. Edward G. Sprague affirms a finding by the state Workers’ Compensation Board that SAIF Corp., a state-chartered workers’ comp insurer, must pay for the weight-loss surgery Edward Sprague underwent in 2001.


The ruling against SAIF and Jerry’s Specialized Sales stems from a knee injury Sprague first suffered in 1976. He reinjured the knee in 1999.


Doctors told Sprague his weight of 350 pounds would prevent successful treatment of the knee condition, so he sought workers’ comp medical benefits for the gastric procedure.


SAIF countered the claim was not compensable because the obesity was not caused by his 1976 accident. But the appeals court agreed with the comp board, which found the injury was more than a minor cause of the claimant’s need for gastric surgery and was therefore compensable.


Filed by Roberto Ceniceros of Business Insurance, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.