Category: Archive

As the 25th anniversary of the 401(k) approaches in January, plan creator Ted Benna has a lot of concerns.

    Benna, now COO of Malvern Benefits Corp., a 401(k) plan administrator, designed the first such plan for the Johnson Cos. in 1981 to give employees the ability to save money on their own. But as 77 million baby boomers begin to retire, he worries that many of them will not have enough income during their retirement.

    “Making sure the retirees can manage their money into an income stream is going to be a forever issue,” he says.

    Ninety-five percent of employees take lump-sum distributions from their 401(k) accounts when they retire. Instead, employers should educate workers about the benefits of sweeping their savings into an annuity and taking out money over a course of several years to make sure it lasts, says Dallas Salisbury, president of the Employee Benefit Research Institute.

    Unfortunately, most companies are so focused on bottom lines, they aren’t thinking of the long-term effects of retirees running out of money, he says. “Companies have to move away from worrying about what the Wall Street analysts think about them this quarter to doing things to protect their market 10 to 20 years from now,” he says.

    IBM addressed this issue by introducing an online service developed by Hueler Cos., based in Eden Prairie, Minnesota. The service allows employees to plug in their information and receive price quotes for fixed annuities. Benna predicts that more companies will follow IBM’s lead. “When big companies do something, others tend to follow,” he says.

    Motorola and BHP Billiton, an Australian mining resources company, are starting to discuss adding annuity options to their menus. Motorola’s concern about offering an annuity is that employees will think that the company is recommending that they use it and thus could be held liable if an employee loses money in the long run, says Randy Boldt, director of global rewards.

    BHP is addressing the retirement income issues through quarterly educational sessions, says Dan Helman, team leader, retirement services. The sessions include an explanation of what annuities are, but not recommendations of specific products.

    The debate on Social Security reform and the changing demographics of the workforce are bringing this issue onto the radar of employers, but it’s still not a pressing issue for employees. “If you give participants a choice, they will take lump sums every time,” says Michael Weddell, a retirement consultant at Watson Wyatt Worldwide.

    Providers will have to overcome the stigma that comes with the notion of annuities as being high-cost, bad investments, Hueler Cos. president Kelli Hueler says. ” ‘Annuities’ is a very confusing and scary word.”

Workforce Management, August 2005, p. 53 —Subscribe Now!

Dan Helman, team leader of retirement services of BHP Billiton’s North American operations, knew that the change he was making to the company’s 401(k) plan would be perceived by some as risky, but he felt certain that it was the right thing to do.

    Starting last fall, the mining resources company began automatically enrolling its 1,800 salaried employees into a managed account program. Under the plan, workers paid Financial Engines, a San Mateo, California, financial advice provider, to invest and oversee their 401(k)s for them. The fees for the advice were automatically deducted from the employees’ 401(k) accounts unless they opted out of the feature.

    “Many companies are nervous about doing this because the Labor Department hasn’t given its blessing that automatically enrolling employees into a managed account program is all right,” says Alicia Munnell, director of the Center for Retirement Research at Boston College. “If something goes wrong, they don’t have that sanctioned official blessing that they aren’t responsible.”

    A growing number of employers with 401(k) plans, such as J.C. Penney and Motorola, have begun offering managed account programs to accommodate employees’ desire to have someone else choose and manage their investments for them. However, only a handful have done what BHP did by making managed accounts the default investment for automatic enrollment.

    The main concern that employers have is that these programs come with added costs. On average, managed account programs cost 0.15 percent to 0.3 percent. Those expenses, which are paid by the employee, are added to the expenses an employee already pays with a 401(k) account. So if an employee pays 1 percent in 401(k) account expenses, that employee could pay up to 1.3 percent for the managed account.

    Motorola, which began offering managed accounts last year through Financial Engines, has decided for now against automatically enrolling employees into its managed account program because of the added costs. “If we did it, we would enroll them into a managed account and make the first 90 days free,” says Randy Boldt, director of global rewards at Motorola. “The employee would get three notices to make sure they were aware of it.”

    Laurel Cochennet, a retirement consultant at Mercer Human Resource Consulting, says that more companies will follow in BHP’s footsteps once the fees for managed accounts go down. “As it becomes a more established service and usage goes up, I am hopeful that the providers will be able to reduce the fees,” she says

    But Helman is convinced that the extra expenses are worth it because employees are getting professional money management expertise. He says that offering managed accounts is a way of providing 401(k) plan participants with the same kind of professional financial management that they may get through a defined-benefit plan, but in a much more transparent way.

    To make sure that its employees understood the process, BHP held face-to-face meetings and put out communications about the program and its fees, which total about 0.1 percent to 0.5 percent, depending on the amount of money in the employee’s account. The bigger the account, the lower the fees, he says.

    Helman says that using managed accounts as the default option actually makes the investment process clearer than the default option most companies are using: the lifecycle fund. Such funds rebalance the assets into more conservative investment choices as the employee approaches retirement.

    “With lifecycle funds, people don’t understand or get to see the process in the way they do with managed accounts,” Helman says.

    Also, many employees don’t invest in lifecycle funds properly, Boldt says. They only serve their intended purpose if employees invest their entire 401(k)s into them. A recent Hewitt Associates study, however, showed that only 13.2 percent of employees invest in a single lifecycle fund.

    Still, not everyone agrees that managed accounts are the solution. “The problem with managed accounts is that the fees tend to only be worth it if you are getting a lot of feedback from the employees,” says Michael Weddell, a retirement consultant at Watson Wyatt Worldwide. He says that companies need to get such information as the employees’ age and planned retirement date to really make managed accounts achieve their best result. “If you don’t get that, you are going to have a hard time explaining why these are better than the less expensive lifestyle funds,” Weddell says.

Workforce Management, August 2005, p. 52 —Subscribe Now!

S ome companies are beginning to doubt the value of stock options as a compensation tool, and it’s easy to see why. There has been a spate of lawsuits involving company stock, brought by employees who believed they were misled about how well the stock was performing. Meanwhile, new accounting rules will require firms to expense stock options on their income statements beginning in their next fiscal year.

    But if a new program by JPMorgan catches on, options could regain some of their cachet.

    Giving company stock options to employees was a prevalent compensation and retention strategy in the ’90s, particularly at technology companies. But after three years of bear markets, more than 50 percent of employees found themselves with options that were “underwater”—their value was less than the exercise price.

    Microsoft was one company to experience this. “Human resources executives were getting calls from employees saying, ‘My options may vest, but they are going to be worthless,’ ” says Robert Barbetti, managing director at JPMorgan Private Bank.

    The technology company decided to stop offering stock options in favor of giving restricted stock, which are grants of shares that vest at the end of a given period if an employee remains on staff. This allowed employees to earn actual shares of Microsoft stock over time, rather than just the option to purchase stock at a set price. But that didn’t help the employees who still had options that were underwater.

    That’s where JPMorgan came in. The investment bank offered to buy the employees’ underwater stock options through a transferable stock option program so that it could use the options as another trading tool in its hedging strategy. With the deal, JPMorgan could trade each option it bought with a separate trade in the stock market that both hedges the bet and gives the bank a margin of profit. “We don’t necessarily care if stock goes up or down, just that it does go up or down,” says David Seaman, a managing director at JPMorgan.

    The move would allow employees to sell a third of their shares upfront and then the rest after two years. The price the employee would get would depend on the maturity of the options. “This was part of a retention strategy,” Seaman says.

Protecting shareholders
    To avoid hurting shareholders of Microsoft by potentially diluting the value of the stock, the company truncated the maturity of the options sold to employees. While this meant that Microsoft employees sold the options for below the potential full market value, the shorter maturity period also reduced the potential for dilution of company stock.

    “Microsoft wanted to design this in a way that it split up the benefit between the employees and the shareholders,” Seaman says. Employees were still able to get cash for options that could be worthless, depending on how the stock performs in the future, he says.

    For example, if an employee was granted options at $33 a share with an expiration of five years and the stock was now at $26 a share, the employee could sell the options to JPMorgan for $4.59 a share. “The majority of employees feel that options are not worth the theoretical value in the first place,” Seaman says.

    Fifty-one percent of the 36,539 eligible employees participated in the program. “Employees said, ‘I would rather get cash even if it’s truncated in value,’ ” Seaman says. JPMorgan is pitching its transferable stock option program as an initiative that companies could implement on an ongoing basis. “This is good for companies that want to stay with options,” Seaman says.

    Microsoft is not the only company to have conducted a one-time transferable stock option program. Comcast made a similar move in September 2004. When the company acquired AT&T Broadband in 2002, former holders of AT&T employee stock options had their options converted into Comcast options. Sixty-three thousand of these options owners were not employees of Comcast, and so the company wanted to give them the ability to cash out and sell their options to JPMorgan.

    The program was designed to help reduce the administrative burden associated with managing the options, Seaman says. “The company was spending millions to maintain these accounts,” he says.

    Unlike Microsoft, Comcast allowed those options owners to cash out immediately and did not truncate the value of the options. Twenty-six percent of owners accepted the offer.

An ongoing incentive?
    Although Comcast and Microsoft chose to do one-time transferable stock option programs, JPMorgan believes that companies could offer these programs on a quarterly basis and use them as an ongoing retention tool, similar to a profit-sharing program.

    “This could provide an ongoing form of compensation,” Seaman says. All growing companies go through periods when their stock is underwater, and a transferable stock option program could enable these firms to continue to compensate employees during those times, he says.

    Observers are skeptical whether such a program would make sense for most companies. “Most compensation plans don’t allow for this kind of move, which means you have to create a business plan behind it,” says Rick Beal, division practice leader for compensation at Watson Wyatt Worldwide. Beal says he is skeptical about whether most boards of directors and compensation committees would see the business value of such a program versus offering restricted stock. Also, companies would have to watch out for what kind of message that enacting such a program would send to the public. They are essentially saying that they do not believe their stock will continue to go up, says Paula Todd, managing principal at Towers Perrin.

    But Seaman says that there is no difference between employees selling their shares for cash and exercising their options, which they usually do as soon as they are vested. While a one-time program like Microsoft’s might only make sense for companies whose stock is underwater, offering transferable stock options on an ongoing basis would make sense for a wide array of companies.

    “Growth companies know that half the time their options are underwater,” he says. So if companies have to expense the theoretical value of the options over time, it makes sense to deliver that value of the option to the employee, Seaman says.

    For companies getting ready to expense their options in the next few months, the program offers definite advantages, says George Paulin, president and CEO of Frederic W. Cook & Co., a compensation consulting firm. One of the big gripes that companies have about expensing stock options is they are listing an expense that they are not necessarily realizing.

    With this program, however, the expense they would list on their income statements wouldn’t be theoretical, he says. “Now those are real expenses, and not just the intrinsic value of them.”

Workforce Management, August 2005, pp. 76-77 —Subscribe Now!

Turnover is an issue that all managers have to deal with, but in the retail industry it’s an epidemic. Given that the jobs are often low-paying part-time positions that are usually filled by high school or college students, retention is almost impossible in certain retail businesses.

    This makes training a particularly tough challenge, says Mike Donahue, who knows the issue all too well. Donahue was once a manager of a Nike store. Every few months one employee would leave and another would start, and Donahue would have to start the training process all over again. “The intellectual capital resides only with senior people at the store, but eventually those people leave too,” he says.

    Seven years after his stint as a manager, Donahue, who is in charge of e-learning at Nike, was asked to design an online training program that the company could offer to employees in its own stores as well as at other retailers that sell its products. He knew that he and his team would have to design a program that would convey a lot of information quickly, but also would be easy to digest.

    “We knew that we did a great job of advertising and that we could drive people into the stores, but ultimately the person that is talking to the customer is a 16- to 22-year-old kid,” he says. “We wanted them to have a better dialogue with the consumer.”

    Nike faced a challenge that a number of retailers today are confronting as they adopt e-learning: Many of these companies face more than 100 percent turnover in their stores, and to train their staffs in a classroom setting is just not cost-effective or even possible for retailers that have stores scattered throughout the country, says Claire Schooley, senior industry analyst at Forrester Research.

    E-learning became a buzzword in human resources departments four years ago, but retailers only recently began installing the high-speed Internet connections needed to run such programs. Fifty percent to 60 percent of retailers have broadband or are installing it, according to research firm Gartner Inc.

    For retailers with a turnover problem, creating a training program that the average retail associate absorbs quickly can make a significant difference to the company’s bottom line, says Bruce Carocci, senior vice president of marketing and sales at Via Training, a Portland, Oregon-based e-learning company. “If my average associate stays on for six months but the regular training cycle takes four months, that is an issue,” he says. “But with e-learning, if I can get team up and running in six weeks, that makes them much more productive.”

The Nike experience
    With that mind, Donahue and his team knew they wanted their program to deliver information in short increments to make it easy for associates to take in–and keep them out on the floor.

    “We were throwing out ideas, and someone suggested that we needed to come up with something edgy, something underground,” Donahue says. That’s when the idea for the Sports Knowledge Underground was born.

    It was by pure coincidence that the acronym for the new program, SKU, also stands for the retail term “stock keeping unit,” Donahue says.

    The layout for Sports Knowledge Underground resembles a subway map, with different stations representing different training themes. For example, Apparel Union Station branches off into the apparel technologies line, the running products line and the Nike Pro products line. The Cleated Footwear Station offers paths to football, whereas the Central Station offers such broad lines as customer skills.

    Each segment is three to seven minutes long and gives the associate the basic knowledge they need about various products. As new products are introduced each season, the training is updated and Nike customizes the program for each retailer if requested. Associates are quizzed at the end of the training and asked for feedback, which gets routed back to Donahue and his team. “If we get feedback that something is confusing, we can go back and change it immediately,” Donahue says.

    Nike ran a pilot of the program in its own stores but now has Sports Knowledge Underground running at external retailers too, reaching about 20,000 associates. Donahue expects that number to quadruple in the next few months as the company continues to place the program in more stores.

    Already Nike has seen results. Stores that have implemented Sports Knowledge Underground have seen a 4 percent to 5 percent increase in sales. “The bottom line is if you can move the needle on the sales floor, it’s worth it,” Donahue says.

Setting standards
    For Nike, one of the most appealing aspects of introducing e-learning is that it sets a standard of learning for diverse workforces. The culture of one store may be vastly different from the next, Donahue says. “One of the problems that a lot of organizations face is that training is usually not a centralized activity,” says Peter McStravick, senior research analyst in learning services at IDC.

    That was one of the primary reasons that Cingular Wireless decided to launch a broad-based e-learning program in its stores when it acquired AT&T Wireless last year. “One of the key strategies for the business was to present a unified front for customers to minimize confusion,” says Rob Lauber, executive director of learning services at Cingular.

    Cingular had e-learning in its stores previously, but now it wanted to use the program to make sure that all of its employees, including those brought in from AT&T, followed the same procedures. “If you were a former AT&T customer and you walked into a legacy Cingular store and wanted a particular service, the training would explain how an associate should address it,” Lauber says.

    Cingular, however, had a unique challenge. For regulatory reasons, it could not go into the AT&T stores or talk to AT&T store managers about the e-learning until the merger was completed. That didn’t happen until October 26. The launch date for the “common services experience” was November 14. That gave the company 19 days to get all 19,000 associates up and running.

    Lauber and his team decided on mixing face-to-face training with e-learning. Two hundred trainers were sent out to the stores to communicate the culture and business strategy behind the new company. For more product and customer-scenario training, Cingular worked with IBM to develop the e-learning program. “It makes sense to use face-to-face contact to explain culture and leadership and things that set the tone for the employee and the environment,” says Susan Varnadoe, learning and development partner at IBM Business Consulting Services.

    To gauge the success of the training, managers quizzed their associates on the programs and the company is conducting pulse surveys of employees to make sure they feel they have the tools they need. Ultimately, Lauber says, the company looks at its business outcome to determine the success of the program. In the first quarter, Cingular saw a net increase in subscribers of nearly 1.4 million.

The future is mobile
    As technology develops, many major companies, such as Wal-Mart, are discussing how store employees could use mobile technology for training. Specifically, there are prototypes for using product scanners as educational devices, allowing an employee to scan a product and call up information about it.

    “Today a lot of learning makes associates go back to learning terminals, and that reduces the time they have on the floors,” says Susan Oliver, senior VP of human resources at Wal-Mart. “We are looking for avenues that would allow us to use the scanner as a form of learning so that you are putting learning in bite-sized segments.”

    Although retailers are eager to bring hand-held learning devices to their sales floors, just when that might become a reality remains to be seen.

    “In a year this will be all over the place,” Varnadoe predicts.

    But Ranjani Iyengar, director of learning and performance management systems at Hewitt Associates, thinks that timeline is ambitious. “There are still issues with content integration and the mainframes within retailers,” she says. “I think it’s going to be a long time before mobile technology is there.”

    Whenever stores begin implementing mobile technology, Nike will be prepared. The company developed its Sports Knowledge Underground program so that it could easily translate to hand-held devices, Donahue says. “When the retailers are ready, we will be ready,” he says.

Workforce Management, August 2005, pp. 74-75 —Subscribe Now!