GOLD RETIREMENT WINNER………By most measures, Lucent Technologies Inc.’s 401(k) retirement plan was a very good one: an employee participation rate of almost 90%–well above the industry norm of 66%; an array of cost-effective, professionally managed, institutional-quality investment options; and an award-winning participant education effort–”401(k) cafes”–where employees could gather and learn about Lucent’s 401(k) plan.
But for Lucent, “very good” was just not good enough. Lucent Asset Management Corporation (LAMCO) felt it could do better with the company’s $7.1 billion voluntary 401(k) plan, which LAMCO oversees along with the company’s $34 billion defined benefit (DB) plan that covers the company’s retirees. “The 401(k) plan was–and remains–an excellent one,” says Bradford Wakeman, LAMCO’s director of public market investments. “At the crux of this initiative was a conviction in continuous improvement and trying to better align the defined contribution plan to the defined benefit plan.” Adds Mark Gibbens, Lucent vice president and treasurer, “It was a matter of the team taking [the 401(k)] to the next level.”
Specifically, data showed that participants could be helped by personalized advice: 83% hadn’t changed their allocations in a year, suggesting a decision-making process that was on autopilot. Even more troubling: 15% of the particpants had their holdings in a single investment option, which in most situations is a definite no-no. Lucent leadership wanted to offer the 75,000 DC participants the kind of tailored investment and asset allocation advice available to wealthy and institutional investors.
Lucent also wanted to reduce management fees by moving from a “bundled” arrangement, which often masks and/or misallocates costs, to a more transparent unbundled plan. By unbundling, the company would gain greater transparency and get to choose the best and most cost-efficient providers. LAMCO’s DB plan was already unbundled and executives felt that it shouldn’t be any different at its DC plan. The unbundling also would allow LAMCO to initiate a securities-lending program and enhance the plan’s monitoring regime.
It was not a tough sell at Lucent. “It was more like rallying the troops around a good idea,” says Jeanmarie Grisi, then LAMCO’s director of investment operations and now its director of real estate investments and risk management. LAMCO headed up the project, partnering with various groups in human resources and Lucent’s legal department.
A selection committee addressed the issue of providing enhanced investment education and advice services. After soliciting proposals from five providers, the selection committee decided to go with Financial Engines Inc., a financial advisory services company, co-founded by Nobel prize-winning economist William F. Sharpe, which offered a robust financial model, user-friendly online services, customizable communications materials and longstanding relationships with many plan record keepers, including the one used by Lucent’s 401(k). “Financial Engines provides a tool so that participants can have professional advice in thinking about how to allocate their assets in their personal retirement accounts,” says Grisi.
Lucent then set about unbundling its 401(k) plan, aided in the effort by Curcio Webb, a leading HR and benefits consultant, which reviewed proposals from potential providers and participated in interviewing them. Lucent evaluated its record keeping and custodial service, choosing to retain Fidelity Investments for record keeping and hiring Mellon Financial Corp. for trust and custody services.
The results have been gratifying, though the change took some getting used to. Unlike the mutual funds in the old bundled plan, the new investment options are institutional separate accounts or commingled funds. These professionally managed funds do not publish prices, nor are they required to since they are not open to the public, though plan participants have online and telephone access to prices and account balances, and Fidelity publishes quarterly fund fact sheets on performance and portfolio characterisics.
One measure of success is the increased usage of Financial Engines. Those numbers are climbing, notes Grisi, as is the percentage of participants resetting asset allocations. And by unbundling, Lucent has achieved enhanced monitoring of the investment advisers and has reduced fees and expenses. The result? The average expense ratio is down to 0.21%, from 0.26%–a 20% reduction. The securities lending program has earned over $1 million–monies allocated to participants. But lowering costs “was gravy,” says Wakeman. “The drivers of the initiative were both philosophical–to align the 401(k) and DB plans–and fiduciary duty.” And, he might have added, a commitment to never getting complacent.