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Defined Contribution Plans At a Large Company

The goal is to provide employees with the ultimate flexibility in planning their retirement.

February 28, 2001
Related Topics: Benefit Design and Communication, Retirement/Pensions
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.

Typeof business:Includes highwayconstruction, speciality chemicals, motor oil and car-care products,chemicals and plastics distribution, refining and marketing.
Numberof employees:27,800

    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."

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