Time & Attendance
By Patty Kujawa
Nov. 10, 2013
The company that transformed the do-it-yourself home improvement revolution with its “You can do it. We can help.” theme takes its own advice and gets a good bit of assistance with its 401(k) plan.
The Home Depot Inc., with $4.5 billion in 401(k) assets and 160,000 participants throughout North America uses Aon Hewitt as its plan administrator and consultant. Home Depot also uses Aon Hewitt’s subsidiary, Hewitt EnnisKnupp, as its investment consultant.
Explaining the Various Retirement Plans
Here is an explainer of benefits plans available to employees, according to the Employee Benefits Security Administration and 401khelpcenter.com:
Defined contribution plans: These are account-based plans and are typically 401(k) plans. All participating employees have an account where they contribute pretax salary dollars and choose from an investment menu provided by the employer. Employers can choose to match employee contributions up to 6 percent. Also, the Internal Revenue Service places a ceiling on how much employees can contribute each year. In 2013, the limit, which doesn’t include the employer contribution, is $17,500. People 50 and over can make $5,500 in catch-up contributions for a maximum of $23,000 this year. Nearly all final payouts are in lump sums.
Defined benefit plans: These are employer-sponsored plans, often pensions, where the employer defines the benefit paid out for life to the employee. The final benefit is determined by a formula, usually based on years of service and final year or years of pay. The plan is funded and invested solely by the employer. The final payout is in the form of an annuity.
Cash balance plan: These are defined benefit plans, but like defined contribution plans, are account-based. In each account, employees get two different types of credits established by the employer: a pay credit and an interest credit.
Brant Suddath, director of benefits for the Atlanta-based company, said outsourcing the daily administration of the plan to retirement experts helps the plan function at a high level while allowing Home Depot workers to concentrate on what they do best.
“The goal for our organization is to focus on our core competencies. For us it is to be the best home improvement retailer in the world,” Suddath said. “To manage our 401(k) plan in-house would detract from what our core business is.”
Managing a 401(k) isn’t easy. There are daily operations to monitor, complicated forms to fill out, money to collect and pay out, and plenty of communication strategies to execute. There’s a lot of pressure on plan sponsors to have highly successful 401(k) plans to help attract and retain workers. Now that 401(k) plans have grown to become the No. 1 way U.S. workers save for retirement, it’s no secret many plan sponsors turn to experts to run the entire plan or certain parts of it.
“Plan sponsors just can’t develop these kinds of processes in-house,” said Andy Miller, director of retirement and investor services at The Principal Group. “They are looking to run a business but want to take advantage of our expertise.”
The service provider universe is a lot like looking at a fast-food restaurant menu. You can order drinks or a side of fries a la carte, or you can go for the whole meal.
It just depends on what you want, and how much you can contribute.
There are three main categories of service providers: bundled, unbundled and alliance. There are pros and cons to each strategy, but the best type really boils down to the needs of the 401(k) plan and its participants, said Brian Murphy, owner and partner of Pathways Financial Partners in Tucson, Arizona.
Some plan sponsors “don’t know what they want or need, and that’s why it’s important to use a process to help plan sponsors truly understand what will work for them,” Murphy said.
Bundled providers are for plan sponsors who want the convenience of one-stop shopping. Record keeping, administration, investment, and education and communication services are done by one company. Just like buying the value meal at a fast-food restaurant, fees tend to be lower because all the work is in one package. Small plans looking to offer a 401(k) but keep costs in line typically look to bundled providers.
“For a lot of our clients, we give them peace of mind,” said Phil Chisholm, vice president of product management at Fidelity Investments, adding that Fidelity’s services can come directly from the company or through a local adviser.
Next is the unbundled approach where the plan sponsor goes out and hires different companies to do each job required by the 401(k). The advantage to this strategy is having the ability to hire the best provider for each task. Plan sponsors can also choose to expand or customize services such as education depending upon the needs of their participants. A common issue with unbundled providers is that the plan sponsor deals with multiple providers, which can be challenging.
A third method is the alliance model where one provider offers the main services like administration and record keeping, and pulls in other vendors or uses staff employees for other needs. One of the benefits to this strategy is that the plan sponsor is still able to get the best services while the main provider of the alliance coordinates the various vendors so the plan sponsor doesn’t need to keep in constant contact with everyone.
Home Depot’s Suddath said the company uses Aon Hewitt as its administrator and plan adviser to leverage the consulting company’s experience managing hundreds of plans. As of December 2012, Aon Hewitt managed 211 plans covering 5.4 million participants with $311 billion in assets. Like several providers, Aon Hewitt routinely surveys its population or combs its record-keeping data to pinpoint 401(k) trends.
“This way we learn from our peers and understand what has worked and hasn’t worked,” Suddath said.
Growing With Growth
In many ways, plan providers have become more sophisticated as the defined contribution market has grown. As of September, 401(k) assets have more than doubled to $3.8 trillion from $1.7 trillion in 2000, according to the Investment Company Institute.
As plans have grown, in terms of participants and assets, services have expanded as well. Until the mid-1990s, plans typically had eight to 10 mutual funds that were valued on a quarterly basis, said Fidelity’s Chisholm. Deciding where to invest retirement dollars at this time was generally the plan sponsors’ job. In the Plan Sponsor Council of America’s 56th annual survey, reflecting 2012 plan experience, plans averaged 19 investment fund options, which are valued daily.
With daily valuations and growing options, plan sponsors shifted the investment job over to participants, creating new service lines for providers. The first was for investment education: Participants needed help in learning basic investment information. The second was helping educate plan sponsors on the dangers they faced if they didn’t provide more than fund brochures.
After a few years, the industry saw that education tools weren’t worth much if workers didn’t participate in plans. In 2006, President George W. Bush signed the Pension Protection Act, giving plan sponsors the leeway to automatically enroll workers into 401(k) plans as well as annually bumping up what they put into their accounts.
It wasn’t a new service, but because of the law, providers — in particular record keepers — expanded their line to offer the service. While it took a few years to gain acceptance, the Society for Human Resource Management’s “2013 Employee Benefits” report showed 41 percent of plan sponsors used automatic enrollment this year compared with 35 percent in 2009. Automatic contribution increases weren’t recorded by the human resources association until 2010, where it was at 18 percent, and which climbed to 21 percent this year.
The automatic features gave way to yet another service explosion: target-date funds. These are professionally managed accounts that have a mix of investments that automatically shift to more-conservative strategies as participants near their retirement date. While they have been around since the ’90s, their need became more apparent when the Pension Protection Act allowed plan sponsors to use the investment fund when automatically enrolling workers.
According to the Plan Sponsor Council of America, nearly 65 percent of plans offer target-date funds. On average, about 13 percent of plan assets went to this investment in 2012, up from 4.5 percent in 2007.
“Target-date funds solved a critical asset allocation issue, because participants would’ve been befuddled in figuring this out,” said Rick Meigs, president of the online resource 401khelpcenter.com. “Target-date funds are a classic example of vendors seeing an opportunity based on a need.”
Another essential hit plan sponsors and providers took last year was when the U.S. Labor Department started a formal process requiring costs to be more transparent. First, all providers are required to tell plan sponsors how much they charge for services. Second, plan sponsors need to tell participants how much they are paying to be in the plan.
While the new rules created an extensive amount of new work for providers and plan sponsors, participants seemed more concerned about getting financial help than worrying about the fees they were paying. In an August survey by Schwab Retirement Plan Services, 61 percent of more than 1,000 participants surveyed said they want personalized investment advice for their 401(k).
Once again, the 401(k) provider universe is responding with increased services, and plan sponsors are signing up. A March WorldatWork and American Benefits Institute study on 401(k) trends showed that 53 percent of 356 plans surveyed said they provided investment advice to employees in 2012. For those that offer advice, 67 percent used an independent adviser compared with 47 percent in 2008.
“Today, plan sponsors are really looking at us in terms of what needs to be done,” said Principal’s Miller. “We host webinars, one-on-one advisory services through our Retire Secure program, and other education programs illustrating how much buying power [participants] have with their retirement balance.”
Mobile communication applications and other advances are being developed to expand the market once again. But one issue — lifetime income solutions — is quickly becoming the top puzzle to solve. Lifetime income is a way participants change their 401(k) savings into a stream of income lasting through retirement.
Like target-date funds and automatic features, lifetime income products already exist. Experts agree they aren’t widely used, mostly because neither the Labor Department nor Congress has weighed in on them yet. Earlier this year, the Labor Department asked for input on ways to show participants what their nest eggs might look like spread over time, and the industry responded with 120 comments.
Winfield Evens, a partner at Aon Hewitt, said the lifetime income market is young, and while there are a range of solutions already in place, providers are competing to dominate the market.
“We are looking to solve retirement income,” Evens said. “If we can solve this dilemma, it’s the right thing to do for participants and it will be good for our business.”
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