GOLD AWARD WINNERS
Dell Inc. and Intel Corp.
If you want something done right, it’s best to do it yourself–or so the saying goes. Certainly, no one at either Dell Inc. or Intel Corp., co-winners of Alexander Hamilton gold in retirement, would quibble with that mantra. As part of overhauls of the 401(k) plans at both companies, each designed its own set of lifecycle funds that offer workers who lack the knowledge or time to invest their money a low-cost option that is tailored to individual retirement schedules.
Intel had three major goals in remaking its $2.5 billion plan: encourage participants to diversify their investments; provide them with low-cost investment choices; and give the plan’s administrators the flexibility to change investment options more easily.
Prior to the facelift, Intel’s plan had offered participants 17 investment options, most of which were retail mutual funds. To supplement what he considered high-cost investment vehicles, Stuart Odell, Intel’s director of retirement investments, devised a line-up that includes 65 mutual funds and lower cost alternatives–five core asset class funds and a group of lifecycle funds. The core funds are commingled trusts, institutional pools of assets that are similar to mutual funds except that they are not registered with the Securities and Exchange Commission (SEC). Using commingled trusts gives Intel the flexibility to easily change managers if a fund is underperforming. Such funds also cost participants less than mutual funds. “There’s a lot of embedded cost in retail products that participants don’t necessarily need to pay for,” Odell says, citing the expenses of marketing mutual funds and registering them with the SEC.
With target dates of 2015, 2025, 2035 and 2045, plus another fund for retired workers, each of Intel’s five lifecycle funds uses a different mix of the core funds. Again, cost was a factor: Odell says he started to think about building his own lifecycle funds when he looked at what mutual fund companies were charging. “I just can’t justify offering employees a lifecycle fund at [a cost of] 100 basis points when all it’s doing is investing in retail mutual funds,” he says. Intel’s fund for employees retiring by 2045 has an expense ratio of just 11 basis points, compared with retail competitors for the same date that are nine times as expensive, Odell says.
Intel rolled out a communications campaign to acquaint employees with the changes and stressed the low cost of the lifecycle and core funds. Since its recordkeeper’s Web site wasn’t set up to display cost data in a consolidated manner, the company created an intranet site with a chart that divided funds by category and compared their costs. A year after the changes were introduced, Intel says participants are allocating about 25% of their contributions to the new options.
Behind Dell’s upgrade of its $1.4 billion 401(k) plan was a desire to provide a bigger company match, eliminate vesting, lower third-party fees and offer investments that were easier for employees to understand. Dell also aimed to design a plan that would pass future discrimination testing.
Dell’s plan already offered participants a variety of low-cost core funds. After looking at the lifecycle funds that were available from outside providers, Dell decided that putting together its own lifecycle series using its core investment options as components would provide “a simpler and more cost-effective vehicle” for employees than going retail. It dubbed its lifecycle funds pre-mixed portfolios (PMPs). Michelle Mahaffey, manager of U.S. retirement programs and the employee stock purchase plan at Dell, says the only expense of the PMPs is the cost of the core funds. “They eliminate the extraneous expenses of off-the-shelf lifestyle funds,” she says. Dell’s plan now has five PMPs–one, an income fund, aimed at workers in retirement or nearing retirement, and funds bearing the dates 2015, 2025, 2035 and 2045–in addition to its nine core funds and a company stock fund.
Dell decided to boost its company match to 4% from 3% and eliminate the five-year vesting period in response to a survey in early 2004 in which employees asked for no vesting period and a higher match. Before making the changes, Dell benchmarked its plan against those at other companies. Besides being participant pleasers, Dell found that the changes qualified the plan for safe harbor status with regard to discrimination testing.
Dell also renegotiated its contract with its third-party administrator, under which Dell paid both per participant fees and asset-based fees. Dell argued for the elimination of the asset-based fees because the third-party administrator wasn’t providing any investment management services. Under the terms of the new contract, Dell pays only per-participant fees, and it has already saved 8% on a year-over-year basis.
Just 60 days after the changes were implemented, participation in Dell’s plan was up 0.4% and the average contribution had increased by 2.0%.
SILVER AWARD WINNER
Bechtel Corp., the privately held engineering and construction company based in San Francisco, improved the quality of its Trust & Thrift plan, which has 401(k) and profit-sharing components, and managed to produce savings at the same time. In the course of 18 months, a working group led by Peggi Knox, the company’s principal vice president for retirement plans, managed not only to revise the plan’s investment options, but also selected new service providers, including a recordkeeper and a custodian-trustee.
Bechtel’s plan had had six investment options, mostly mutual funds from a single provider. It decided to switch to an unbundled approach and replaced the mutual funds with eight core funds from a variety of managers. It also put together three portfolios, categorized by risk as conservative, moderate and aggressive, which use the eight core funds as their components. By moving the new funds to separate trusts or commingled accounts, rather than mutual funds, Bechtel ensured that they have much lower expense ratios and don’t carry the fees associated with mutual funds. Depending on their investment choices, participants pay 25% to 75% less on fund expenses with the restructured plan, Knox says.
Bechtel’s decision to select new service providers was complicated by its trustee’s decision to exit the business and its recordkeeper’s decision to stop working with big plans like Bechtel’s. The company managed to speed up the process of replacing those providers, most notably converting the $3.5 billion plan to a new recordkeeper, JPMorgan Retirement Plan Services, over a three-day weekend and without any blackout period. As it selected new service providers, Bechtel sought higher quality, like enhanced communication and education for participants. It also lowered its costs by reducing its investment management, recordkeeping and custodian fees. The company says savings will equal $5.9 million a year, or about 33% of its former cost.
“One of the best things that has come out of this restructuring is the transparency of the plan–transparency to participants about fees and to the committee about the quality of the service providers that we have, including investment managers,” Knox says. “We can see specific pieces of the plan and make individual decisions about those specific pieces.” She credits the increased transparency, as well as the company’s stepped-up communications, for the rise in the participation rate, to 82% from 79%. The portion of participants making catch-up contributions also rose, to 27% from 21%.