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Playing Hardball on 401(k)s

October 27, 2005
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Two weeks ago, aerospace giant Lockheed Martin Corp. made a decision that is getting all too common: The company replaced its traditional defined-benefit pension plan with a 401(k) defined-contribution plan for any new and rehired employees who begin work in 2006.

    The reason is simple. Lockheed’s pension plan has grown to $23 billion. Not only is the size of its pension obligation staggering--it is one of the largest in the U.S.--but the company’s ever increasing cost of funding the plan is a major concern to investors.

    Lockheed hires 10,000 new workers annually, and CFO Chris Kubasik told The Wall Street Journal that "10 to 15 years out, the savings from the new plan could be $125 to $150 million a year." The company will still contribute 3 percent to 6 percent of a worker’s salary into the new plan, but the responsibility for how to manage and invest this money falls squarely on the employee.

    That’s one of the big benefits of a defined-contribution plan--freedom of choice. Workers are free to choose how much they want to contribute and what specific investments they want to put their money into. It’s a great system, in theory, but only if employees take the time to make sensible decisions. Unfortunately, many don’t.

    "People spend more time choosing a TV than choosing their 401(k) investments," says Jeffrey Miller, president, Mercer HR Services. And, he adds, there are 20 million workers who could be contributing to a 401(k) plan who aren’t. "What are they going to do at retirement?" he asks.

    Miller, who spoke at this month’s West Coast Defined Contribution/401(k) Conference sponsored by Pensions & Investments and Workforce Management, thinks that companies with 401(k) plans need to be a lot more aggressive in getting workers to face the fact that their retirement is coming and they need to be ready for it. To back up his argument, he cited two sobering statistics: 1) That 48 percent of employees are not confident they know how much money they need for retirement; and 2) that three of four workers ages 55 to 64 have less than $60,000 saved for their 20 to 25 years of retirement.

    To Miller, there is only one answer to this problem--auto enrollment, where management makes the decision to automatically enroll workers in the company’s 401(k) plan unless the employee specifically requests to opt out of it. "Selling a 401(k) to workers as a choice does a disservice," he said.

    He lists five steps that companies with 401(k) plans should take to help workers get ready for retirement:

  • Automatically enroll every employee in the company’s 401(k) plan, forcing them to opt out if they don’t want to participate. "And we need to put a box on the (opt-out) forms saying ‘I choose not to retire,’ " Miller says.

  • Enroll every participant at a 7.5 percent contribution level. Miller notes that in Australia, the system automatically enrolls workers at a 9 percent contribution level. "They are either better at math, or better at confronting reality," Miller says.

  • Make sure that every participant is mapped into a diversified, age-based investment.

  • Make sure that every participant gets a 2.5 percent auto-deferral increase annually.

  • See that every participant has a professional investment adviser available for retirement.

    If this sounds tough, it is. Miller recommends 401(k) hardball because he believes that top management must be more aggressive in helping workers plan for retirement--especially since more companies are following the Lockheed example and pushing their workforce out of traditional pensions and into 401(k) plans.

    "It’s not easy," he says. "Saving for retirement is one of the hardest things you’ll ever do.

    "It’s not a choice," he says, "it’s a requirement. Savings doesn’t just happen. The message to your employees needs to be simple: Save more."

Workforce Management, October 24, 2005, p. 58 -- Subscribe Now!

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