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Defined Contribution Plans At a Small Company

Defined contribution plans can be an attractive option to help small companies compete in the race for talent.

February 28, 2001
Related Topics: Retirement/Pensions, Benefit Design and Communication, Candidate Sourcing
M any small companies don't offer any retirement plans. Among the reasons, plans require a costly commitment that can affect a sometimes cash-strapped bottom line. That's especially true with a defined benefit plan, says John Scott, director of retirement policy for the Washington, D.C.-based Benefits Council, formerly the American Association of Private Pension and Welfare Plans.

Type of business:Designer/printer ofscreened and digitally printed graphics
Numberof employees:300

    Defined contribution plans, on the other hand, have more employer flexibility. They also can be an attractive option to help small companies compete in the race for talent.

    The latter is one reason why Lowen Corp., a 50-year-old private company, started its 401(k) plan in 1995. Even though its locale is rural, Lowen, like many other small companies, has to fight to find and keep good employees. "To attract and retain the best employees, you have to have some type of retirement plan because it shows those employees that you care and it also keeps you competitive," says Ann Brown, company president.

    Before 1995, the then-approximately 200-person company had no pension benefits even though its employees averaged about 10 years of service, Brown says. Lowen is an industry-leading designer and manufacturer of screen-printed and digitally printed graphics for products like real estate yard signs. "We were a small company transitioning intobecoming a larger company. [Adding benefits] is all part of the process to become more responsible to our employees."

    Today the company has 300 employees, two-thirds of whom participate in a 401(k) plan that's valued at $2 million. That's pretty good participation and an indicator that employees like the program, Brown says. The company matches 50 cents on the dollar up to 4 percent of someone's salary, with a $650 per year company contribution cap.

    That's up from just 3 percent and a $500 maximum when the plan started. But it's still less than the 6 percent match that's the norm for two-thirds of medium and large companies, according to Mercer data. After two years of service, Lowen employees are vested incrementally at 20 percent per year, with full vesting at seven years.

    As is typical of companies of any size, Lowen selected a manager/carrier , Great-West Life & Annuity Insurance Co., that provided investment options, from a simple conservative money market account to individual mutual funds or fund packages with varying levels of risk.

    Participating Lowen employees each have an account and password and can access their information online, check account balances, and change holdings anytime.

    Brown says Great-West is working out well, but that wasn't the case with its predecessor. That provider was a nightmare and taught the small company a few lessons over three years' time. Originally, Lowen bought into a package deal that offered one provider as administrator and another as investor. The company had done its due diligence and thought it was making the right decision, Brown says.

    The provider was a big company; Lowen officials knew others who had used it; it was a provider whose investments the company believed in; and they checked references to make sure the provider had a good working relationship with the administrator.

    But the end result was finger-pointing on the part of the two providers and a bookkeeping nightmare for Lowen's controller. No money was lost, but there were a lot of headaches. The biggest lesson learned, Brown says: Don't make a decision based on one person who represents that provider.

    "Our agent left the administrative firm almost right after we contracted with him, and with him went a lot of the service.... We were rookies, and I guess we were going to have to learn some of our own lessons. But I think the important thing is that we did make a change, that we didn't let the enormity of making that change stop us from doing it."

    Today, even though Great-West provides the plan bookkeeping and administration, Lowen's HR department isn't out of the loop. It still has the responsibility to communicate the program and educate employees about the benefits of a 401(k), Brown says, even when investing as little as $10 a week. HR officials have annual meetings with small groups to talk about the plan and regularly try to show employees the benefits of compounding and investing. One way to do the latter, Brown says, is with concrete examples of the dollars-and-cents results of extended savings over time.

    Statistics support that. Last year Watson Wyatt, in a study of companies offering 401(k) plans, found that employers that communicate the time value of money and the need for income in retirement at least quarterly tend to have higher 401(k) participation rates. The study also found that participation rates jumped nearly another 6 percent in firms that provided personalized 401(k) statements to their employees.

    A last piece of advice to companies either considering offering 401(k) plans or struggling with existing ones. To get employee participation, offer matching funds. "If you don't have a match on a 401(k), it's almost impossible to get the participation to allow your program to be effective," says Brown.

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