Benefits Buzz

Economic Crack for Employees - The 401k Debit Card....

Gas prices are up, food prices are up.  The pressure is on from all corners...

Tough economic times mean that your employees will be looking for nickels and dimes in the sofa but also in the workplace - by looking to tweak their tax withholdings, opt out of medical employee contributions, and other extreme measures.

It's up to you to provide counsel to them.  One tool that some take advantage of, in times like these, is the 401k loan.  It's a bad idea from a retirement standpoint but part of the plan.  Most 401k loan programs have enough hoops and come with enough penalties and poison pills that employees look elsewhere for cash. 

A new kind of economic crack has hit the streets - the 401k Debit Card....From the Wall Street Journal:

"Debit cards are straightforward. You use them for purchases and money is deducted from your bank account. But when the debited account is your 401(k) retirement plan, critics angrily line up to take a swipe at that piece of plastic.

It isn't hard to see why. The 401(k) debit card lets you borrow from retirement savings and pay yourself back with interest over time, much as you would with a typical 401(k) loan. Only the card makes it much easier to crack your retirement nest egg; all you do is shop, swipe and sign.

To the advisers, brokers and financial institutions pushing workers to save more for their futures and consider the 401(k) sacred, this debit card isn't just objectionable, it is blasphemous.

The rub is that employees evidently like the ability to borrow; studies show it actually makes them more likely to contribute to a retirement plan. Most 401(k) participants have access to loans and about 20% have gone through hoops and hassles to get one.

Yet employers seem to be drawing the line with the debit card. Although the product has been around for several years, few companies offer it. They are focused more on automatically enrolling U.S. workers in plans, not handing out quick and easy loans.

One advantage of a debit card is that if you are laid off or leave the company, there may be no pressure to reconcile the debt immediately. With a typical 401(k) loan, the outstanding amount must be repaid in full, usually within 90 days. Otherwise the loan amount is considered a taxable distribution."

I'm sympathetic to those who need cash, but the 401k Debit Card makes it too easy.  When a vendor comes around to sell you on these, do humanity a "solid" and just say no...

Is IBM the Innovator in the 401(k) Business?

Let's face it - it's a bad time to talk 401k to employees.  With a market that topped at 14,000 in the dow and dropped all the way down in the 7,000 range, most employees who were fully invested in stocks took haircuts in the range of 30-40% of total assets.  That means when it comes time to pump up the old 401k, the audience isn't exactly receptive in most companies to benefit and HR pros - in fact, it can be hostile.

One of the areas I've struggled with in the past few years is running HR shops for companies that fall below the Fortune 500 space.  Buying power is a big deal in the 401k business, and if you are a venture capital-held firm with a couple of hundred employees, you've got limited power to minimize the things you might be able to control for employees - plan design, mutual fund fees, etc.  As an example, I was told last year that in order to enter the 401k space with Vanguard (a mutual fund company that believes in "indexing" and thus is among the best in the company at keeping fees low), you need at least 25 million in assets in your 401k.  Less than that?  You need not apply.

I give you that intro as a backdrop to a recent BusinessWeek article on 401ks at IBM, which recently dropped its pension line to create a supercharged 401k for its employees:

"Back in January 2008, IBM (IBM) replaced the last of its pensions with a new-and-improved 401(k). The plan came with plenty of enticements, befitting a company that earned more than $10 billion on $99 billion in revenue the previous year. There were generous matching contributions, super-low fees, custom-designed portfolios, free access to financial coaches, and more. Even so, critics hammered IBM's move as one more sign of retreat from the secure retirement benefits of the past.

Today, hardly anyone is complaining about IBM's 401(k), least of all the participants. The plan is sumptuous compared with offerings from most companies. Across the U.S., 401(k)s have been bludgeoned by the financial crisis. Balances have shrunk to a fraction of their former value, and many companies have slashed matching contributions. Yet IBM is sticking with its plan—one of the largest in the U.S., with $27 billion in assets. "In my job, I often hear horror stories," says J. Randall MacDonald, senior vice-president for human resources, who led the shift from pension to 401(k). "I don't hear horror stories about the 401(k)."

IBM's creation isn't revolutionary in design or implementation. But it combines most of the best features of 401(k) plans at other companies, then leverages IBM's size to wrangle cut-rate fees from investment firms that want to manage its retirement assets. With 94% participation among more than 100,000 active U.S. employees, the plan boasts an average employee balance of $127,000, more than double the national average. Fees, which have a bigger impact on long-term results than most people realize, typically are just 10 basis points, or 0.10%. "IBM takes a very paternalistic and serious attitude in terms of the quality and the cost to participants," says Ted Benna, chief operating officer of pension consultant Malvern Benefits and the man considered to be the father of the 401(k).

Having weathered the recession, at least so far, IBM is now toying with some truly radical ideas. MacDonald hopes someday to meld retirement and health benefits into compensation, leading to a performance-based 401(k) through which top performers could be rewarded with better benefits. Given IBM's size and clout, any trail it blazes in this area could alter the retirement landscape dramatically.

 

Is there any doubt that size matters?  One example - fees in the IBM plan are .10% on average?  That's clearly related to the purchasing power of the small nation that is IBM.  A small company is lucky to have one or two funds out of 15 that have fees of .30%, with the rest of them moving toward 1.00% in a pretty quick fashion...

So, the IBM plan is great, but the biggest benefits are a reflection of the size of the company...

Your 100% 401k Match is Weak Compared to....McDonalds?

You expect to get beat on the 401k front by GE, Google and Microsoft.  You don't expect to get beat by McDonald's.

Right - the McDonald's with "hamburgler". More on the McDonald's 401k from BusinessWeek:

"To stanch the bleeding of valuable talent, McDonald's in 2004 began offering a rich retirement savings perk. Employees who put 5% of their salary in the company 401(k) receive a company match of as much as 11%, turbocharging their savings right off the bat. To make sure employees take advantage of the program, McDonald's has made enrollment automatic. And to ease the pain of automatically deferring 1% of pay, the company gave managers a one-time, 1% salary increase.

McDonald's corporate match is especially extravagant at lower levels of saving: employees who put just 1% of their salary in the plan get $3 for every $1 they invest. (Most companies won't even match a contribution until an employee puts in at least 3%.) McDonald's then makes a dollar-for-dollar match on the next 4%. After that there's a potential profit-sharing match of up to 4%. All told, workers who save 5% of their pay can see the total swell to 16%.

But corporate 401(k) plans aren't an if-you-build-it-they-will-come kind of benefit. Companies can send out pamphlets, but the burden of persuading employees that the plans are worthwhile ultimately falls on people like Kenny Sanders, who heads human resources for the "Heartland" region of McDonald's, overseeing 76 company-owned stores. Like Travis, Sanders, 44, started working at McDonald's in St. Louis when he was a teenager. Over the past 28 years he has risen through the ranks beyond store manager to corporate management.

McDonald's crew members don't sit in front of computers all day, leaving little opportunity to check 401(k) balances or make tweaks to asset allocation plans at work. So Sanders spends much of his time out in the field talking to employees about their financial future. "My goal is to get people to understand that this is more than a job. You can put away a nice nest egg for you and your family, depending on how long you stay at this company," Sanders says."

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