Manufacturing Finds Defined Contribution Plans Work Best

Susan J. Marks

Competition in today's tight labor market has forced even small companies to realize that pension and retirement benefits make a difference to employees. These benefits can be a tool to attract and retain talent, a way to compensate employees for gambling on a start-up, or just plain good sense from an employee-relations point of view.

Jobs today are not about lifetime employment. The 21st-century workforce is transient. Most people will have more than half a dozen jobs in a lifetime. Employees like portability and practicality in retirement benefits. They are demanding and getting more choices, visible cash benefits plans, self-service participation, and access to and self-direction of investments.

Traditionally, most companies offered defined benefit plans, which favor long-term employees. An employee works for the same company for 30-odd years, retires, then receives a monthly pension check based on a predetermined formula. That works well for people who have the same employer for life, but not so well for a mobile workforce. Termination well before retirement offers few, if any, benefits.

Instead, there has been a shift by employers of all sizes to defined contribution plans or hybrids of defined benefit plans that offer employees more visible value, says Steve Vernon, vice president and consulting actuary for Watson Wyatt Worldwide in Los Angeles. Defined contribution plans are individual retirement accounts based on amounts contributed or allocated, like a 401(k). Matching funds are optional.

From an employer's point of view, these defined contribution plans can be less costly and transfer the risk and responsibility to the employee, says Craig Copeland, senior research associate with Employment Benefit Research Institute, a Washington-based nonprofit group. They are especially popular with small- and medium-size employers because they aren't as complex from a regulatory standpoint and don't require costly actuarial evaluations, adds Anna M. Rappaport, a Chicago-based principal with William M. Mercer Inc., worldwide benefits consultants.

Here's a look at how three companies, all involved in manufacturing of various kinds, are coping with changing workforce demographics and the retirement issue.

Small Company

Name: Lowen Corp.

Location: Hutchinson, Kansas

Type of business: Designer/printer of screened and digitally printed graphics

Number of employees: 300

Web site: www.lowen.com

Many small companies don't offer any retirement plans. Among the reasons, plans require a costly commitment that can affect a sometimes cash-strapped bottom line. That's especially true with a defined benefit plan, says John Scott, director of retirement policy for the Washington, D.C.-based Benefits Council, formerly the American Association of Private Pension and Welfare Plans.

Defined contribution plans, on the other hand, have more employer flexibility. They also can be an attractive option to help small companies compete in the race for talent.

The latter is one reason why Lowen Corp., a 50-year-old private company, started its 401(k) plan in 1995. Even though its locale is rural, Lowen, like many other small companies, has to fight to find and keep good employees. "To attract and retain the best employees, you have to have some type of retirement plan because it shows those employees that you care and it also keeps you competitive," says Ann Brown, company president.

Before 1995, the then-approximately 200-person company had no pension benefits even though its employees averaged about 10 years of service, Brown says. Lowen is an industry-leading designer and manufacturer of screen-printed and digitally printed graphics for products like real estate yard signs. "We were a small company transitioning into becoming a larger company. [Adding benefits] is all part of the process to become more responsible to our employees."

Today the company has 300 employees, two-thirds of whom participate in a 401(k) plan that's valued at $2 million. That's pretty good participation and an indicator that employees like the program, Brown says. The company matches 50 cents on the dollar up to 4 percent of someone's salary, with a $650 per year company contribution cap. That's up from just 3 percent and a $500 maximum when the plan started. But it's still less than the 6 percent match that's the norm for twothirds of medium and large companies, according to Mercer data. After two years of service, Lowen employees are vested incrementally at 20 percent per year, with full vesting at seven years.

As is typical of companies of any size, Lowen selected a manager/carrier, Great-West Life & Annuity Insurance Co., that provided investment options, from a simple conservative money market account to individual mutual funds or fund packages with varying levels of risk.

Participating Lowen employees each have an account and password and can access their information online, check account balances, and change holdings anytime.

Brown says Great-West is working out well, but that wasn't the case with its predecessor. That provider was a nightmare and taught the small company a few lessons over three years' time. Originally, Lowen bought into a package deal that offered one provider as administrator and another as investor. The company had done its due diligence and thought it was making the right decision, Brown says. The provider was a big company; Lowen officials knew others who had used it; it was a provider whose investments the company believed in; and they checked references to make sure the provider had a good working relationship with the administrator.

But the end result was finger-pointing on the part of the two providers and a bookkeeping nightmare for Lowen's controller. No money was lost, but there were a lot of headaches. The biggest lesson learned, Brown says: Don't make a decision based on one person who represents that provider. "Our agent left the administrative firm almost right after we contracted with him, and with him went a lot of the service....We were rookies, and I guess we were going to have to learn some of our own lessons, But I think the important thing is that we did make a change, that we didn't let the enormity of making that change stop us from doing it."

Today, even though GreatWest provides the plan bookkeeping and administration, Lowen's HR department isn't out of the loop. It still has the responsibility to communicate the program and educate employees about the benefits of a 401(k), Brown says, even when investing as little as $10 a week. HR officials have annual meetings with small groups to talk about the plan and regularly try to show employees the benefits of compounding and investing. One way to do the latter, Brown says, is with concrete examples of the dollars-and-cents results of extended savings over time.

Statistics support that. Last year Watson Wyatt, in a study of companies offering 401(k) plans, found that employers that communicate the time value of money and the need for income in retirement at least quarterly tend to have higher 401(k) participation rates. The study also found that participation rates jumped nearly another 6 percent in firms that provided personalized 401(k) statements to their employees.

A last piece of advice to companies either considering offering 401(k) plans or struggling with existing ones. To get employee participation, offer matching funds. "If you don't have a match on a 401(k), it's almost impossible to get the participation to allow your program to be effective," says Brown.

Medium Company

Name: Monarch Marking Systems

Location: Miamisburg, Ohio

Type of business: Manufacturer of bar-code printers and related supplies

Number of employees. 1,020

Web site: www.monarch-marking.com

Education is essential, given the different retirement options available to employees today, EBRI's Copeland says. Unfortunately, not all employers are providing it. As a result, people leave companies with large sums of money in their retirement plans and little idea what to do with them.

That's not the case at Monarch Marking Systems. Vice president of HR Rhonda Mangieri does her best to make sure of that at the Miamisburg, Ohio-based subsidiary of Paxar Corp. Monarch is a leading provider of bar-code printers and related software, services, supplies, and labels.

The company also is on the cutting edge when it comes to technology-assisted HR. Retirement and pension options are no exception. Administration of Monarch's more than $50 million defined contribution or 401(k) plan is

paperless and has been since January 2000. Enrollment is primarily online through the outsourced 401(k) provider, CIGNA Corp.'s Retirement & Investment Services. (Plan enrollment and changes also can be done via telephone.)

But Mangieri's staff plays an active role nonetheless. Communication with employees and administrators doesn't go away just because plan administration is outsourced. It's especially important if employees are used to a more traditional paternalistic relationship, with direction and hand-holding from a company's internal HR staff, says Mangieri. That staff still has a responsibility to keep on top of developments, and to remind employees of provider access numbers, plan availability, and general plan provisions. "It's so important that when you outsource, people understand that you are not disconnecting them from the company but offering them more....You always have to sell the value of your benefits and to sell the value of your benefits when they have been outsourced."

Mangieri's staff has brochures for employees that list phone numbers, Web sites, and other contact information for all the company's benefits vendors. The staff frequently updates employees about new plan or investment information from CIGNA, and periodically meets with employees to keep them informed. Plan updates and information also are posted the old-fashioned way on bulletin boards. Any HR staff member can answer general retirement-benefits questions, too, courtesy of a "cheat sheet," even though one person specifically handles the benefits and works with third-party providers.

Mangieri estimates that the company has reaped a 20 percent cost savings with its current system. Her staff has downsized from 22 in 1996 to 13 before the full online launch in 2000 to just 5 today. Benefits administration alone went from four employees to just one person. Aside from administrative cost savings, the out-sourced provider also does a better job in terms of communication with employees through material and online access, she adds.

Employee reaction to the system has been good. They like the online visual access to their accounts better than the automated telephone responses that were used prior to January 2000, says Mangieri. There also doesn't seem to be any reluctance on the part of employees or retirees to use PCs. Two years ago, Monarch, in a random sampling of about 500 manufacturing employees, found that 52 percent had PCs at home. That's in addition to most employees already using PCs on the manufacturing floor.

Another key element to the success of any company's 401(k), says Mangieri, is communication between vendor and employer. "Make sure your provider understands your vision, your philosophy relative to providing services to your employees, and that one of those paramount things has to be education. They have to have a willingness to educate, to keep your group informed of what's going on, and to do onsite educating of employees."

Large Company

Name: Ashland Inc.

Location. Covington, Kentucky

Type of business: Includes highway construction, speciality chemicals, motor oil and car-care products, chemicals and plastics distribution, refining and marketing.

Number of employees. 27,800

Web site: www.ashland.com

Choice is the name of the retirement-plan game at Kentucky-based Ashland Inc., a $9 billion company employees in 142 countries and a $500 million pension plan. The Fortune 250 has many variations on its retirement plans, but most of its employees--ranging from collectively bargained groups to hourly and salaried ones--choose from defined benefits or defined contribution options. That's typical of many medium and large companies. Mercer reports that 64 percent offer that kind of option, compared with 35 percent that offer defined contribution only and 1 percent that offer only defined benefit plans.

As is typical of defined benefit plans elsewhere, Ashland adds more choice through early retirement with reduced benefits. It's not to cull the workforce, but to provide employees with the ultimate flexibility in planning their retirement, says Philip W. Block, administrative vice president of human resources worldwide. Retirement with full benefits is available at age 62. The plan also offers a variety of payout options ranging from straight life annuity to various joint and survivorship ones based on actuarial formulas.

Employees have still more choice through Ashland's outsourced defined contribution provider, Fidelity Investments, which offers 15 investment options--up from 10 options five years ago.

Ashland has self-service employee access to benefits data via its intranet. Employees can even customize their PC screen savers with pension/investment data complete with briefly delayed market results.

The primary role of Ashland's HR department in the retirement mix, Block says, is to facilitate employee participation. That's done in a number of ways, including education and the design of the plan offerings themselves. The latter means that the company's responsibility is to understand the marketplace and be the employee's advocate to assure it's providing meaningful retirement benefits, he says. The company also holds investment seminars for employees and offers "Finance 101" investment basics.

Despite the vastness in both size and scope of its workforce and retirement options, Ashland has only 35 people out of its 176-person worldwide HR workforce handling in-house administration of the defined benefits plan and the equivalent of only 1.5 people working full-time on the company's 401(k).

More than 70 percent of Ashland's employees participate in both plans. With its 401(k), the company provides a 105 percent match dollar for dollar up to 4 percent of an employee's salary per year. Eligibility is immediate, and there is no vesting period.

That match is more generous than most companies', says Mercer's Rappaport. Only 1 percent of companies offer a match greater than 100 percent, and the overwhelming majority--63 percent--have a match rate of 50 cents or less on the dollar.

What does all this add up to on Ashland's bottom line? The cost to Ashland is about the same whether an employee opts for a defined benefit or defined contribution retirement plan, Block says.

Beyond the cost issue, Block says, a company's decision on which retirement options to offer is about the perceived benefit based on employee expectations. "I can tell you after 20 years in HR that 30-year-old employees see no perceived benefit from a defined benefit plan because they don't understand how it's calculated and they don't think they are going to be around for 30 years of service anyway. Hence they are much more appreciative of a defined contribution plan, which shows up to them as a dollar amount that they can receive when they retire, a single kind of lump sum, if you will."

Also, when a company looks at which type of plan makes the most sense, it has to consider its business strategy, Block adds. If, for example, a strategy is predicated on long-term involvement, with a goal of keeping employees for their careers, probably a combination of both defined benefit and defined contribution plans is best. However, if the strategy involves a lot of project work done by short-term employees, then a defined contribution plan makes more sense because of its portability and value to the worker.

And if the competition offers choices--as in Ashland's case--your company had better offer them, too, he says. That doesn't mean, however, that a mix of both is right for every company. "If I were a high-tech company or I were a start-up company today and had visions of becoming a large company, I'm not sure I would offer both. I would probably offer the defined contribution plan primarily because if you believe all the rhetoric about employees having seven jobs over their working careers ... then a defined benefit plan is never going to generate for that employee a significant amount of retirement income, whereas participation in seven different defined contribution plans could."

On the downside of the trend toward more choices, not every employee of every company has the financial expertise to make the right investment decisions, warns Watson Wyatt's Vernon. "Probably the biggest problem we are seeing: employees for the most part are getting lump-sum payments, and when they retire they have to make that last for the rest of their lives.... That's a pretty complex task. That's where I think having too much choice or too much flexibility can be a problem."

Susan J. Marks is a Denver-based freelance writer.

Retirement Options: A Primer

Here's a look at a few of the many retirement options offered in today's workplace.

Defined benefit plan: A benefit annuity for life available at retirement or shortly before with reduced benefits.

Concerns:

* Today's worker is more mobile and less likely to stay at one job until he or she meets the enhanced benefits eligibility threshold. As a result, the employee can be left with little or no benefit.

* The cost of ongoing actuarial calculations and compliance with rules and regulations can be hard on small and medium-sized companies that lack the economies of scale of their larger brethren.

Defined contribution plan: An individual retirement account that allows an employee to contribute a percentage of pay up to a certain amount tax-deferred. Some employers offer a percentage match up to a maximum amount and based on eligibility requirements such as a vesting.

Concerns:

* The risks of saving for an individual's retirement are shifted from employer to employee, which many employees may not be able to handle.

* Employees are not fiscally prepared. These lump-sum retirement distributions require a new level of employee education about investment and money management, says Craig Copeland, senior research associate with Employment Benefit Research Institute.

Cash balance plan/Pension equity plan: Similar hybrid defined benefit plans that pay a specified amount on termination or retirement based on a predetermined formula, but look like defined contribution plans because they appear to accumulate assets annually in hypothetical accounts.

Concerns:

* These can be controversial, because they can leave long-term employees in the lurch with reduced benefits if they are not phased in to preserve older employees' benefits.

* Employees are not fiscally prepared.

Stock options/Equity: Employees receive stock or a share of a company with the potential for long-term growth. This is especially popular at high-tech companies, says John Scott, director of retirement policy for the Washington, D.C.-based Benefits Council, formerly the American Association of Private Pension and Welfare Plans.

Concerns:

* Much of a person's retirement savings could be in one asset, the value of which may go up or down.

Phased retirement: Any flexible approach that allows employees to reduce work hours and/or job responsibilities to ease into full retirement. How popular is it? In a 1999 Watson Wyatt survey of almost 600 medium-sized companies, 16 percent offered phased retirement, with another 25 percent looking at it in the next few years. "However, as many as 50 percent of workers over age 55 are working in retirement, suggesting that many workers are creating their own phased retirement by leaving their current job and working a reduced schedule at another organization," adds Valerie A. Paganelli, a Seattle-based consulting actuary with Watson Wyatt.

Concerns:

* IRS rules prohibit distribution of benefits from defined benefit plans to employees who are still on the payroll prior to normal retirement age.

* 401(k) plans are prohibited from making in-service distributions prior to age 59 1/2.

* Incomes for employees may be inadequate.

* Corporate culture and succession planning often don't support the strategic idea.

Benefits-Related Stories at Workforce.com

Cash-Balance Plan Conversion Communication Checklist

Communicating the transition of current pension benefits to a cash-balance plan account requires several considerations. Below is a checklist that may help you determine what to say, how to say it, and why.

http://www.workforce.com/archive/article/000/41/83.xci

Defined Contribution Plan Prevalence

A chart of the percentage of employers offering various retirement savings programs.

http://www.workforce.com/archive/article/001/13/76.xci

Retirement Programs Offered Alongside 401ks

A chart indicating how many employers -- of those who offer 401ks -- also offer additional savings benefits.

http://www.workforce.com/archive/article/001/l3/77.xci

Web Sites for Retirement Planning

Some sites where employees can crunch numbers.

http://www.workforce.com/archive/article/000/95/64.xci

Getting the Most from Your Retirement Plan Design

Some advice on overcoming common roadblocks.

http://www.workforce.com/archive/article/000/95/63.xci

Merging 401(k) Plans

When Staples Inc. acquired three companies in less than a year, the company's HR staff successfully combined their different 401(k) benefits.

http://www.workforce.com/archive/article/001/11/36.xci

Benefits Forum

Exchange ideas about health, pensions, and more.

http://www.workforce.community/forums/forum.ohtml?

node=5484

Web Sites With More Information on Retirement Benefits

Department of Labor Report on Phased Retirement

http://www.dol.gov/dol/pwba/public/adcoun/phasedrl.htm

Department of Labor Employee Benefits Survey

http://146.142.4.24/cgi-bin/surveymost?eb

Employment Cost Trends

http://146.142.4.24/cgi-bin/surveymost?ec

Social Security Online: The official site of the Social Security Administration

http://www.ssa.gov/

International Foundation of Employee Benefits Plans

http://www.ifebp.org/

The Pension Research Council

http://prc.wharton.upenn.edu/prc/prc.html

The Pensions Institute

http://www.bbk.ac.uk/res/pi/

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