EMPLOYEE BENEFIT PLANS

June 2000

BENEFITS PERSPECTIVE 2000S

By Donald E. Favata, CFP, Geller & Wind, Ltd.

Employers now design their defined contribution plans to permit employees to direct the investment of their account balances. Participant-directed defined contribution plans include 401(k) plans, profit-sharing plans, and money purchase pension plans. Employees continue to contribute to their retirement plan portfolios and therefore need to decide where to deposit their next investment dollars.

Plan participants seeking to diversify their retirement assets with additional types of investments as a way to reduce risk can consider growth sectors and stable value assets including the following:

* Technology, telecommunications, and biotechnology stock funds;
* Microcap stock funds;
* Mid-cap European stock funds;
* Pacific Rim/Asian stock funds;
* Real estate investment trusts; and
* Managed guaranteed insurance contracts (GIC) portfolios.

Plan participants should seek professional advice, allocate their investments among different equity management styles and asset classes, and rebalance their portfolios periodically. They should also take into account growth stock funds and value stock funds and may consider investing in the stock funds of a specific sector or industry. The risks associated with sector funds are more like those of individual stocks than of broad-based mutual funds. Although sector funds offer the potential for dramatic capital growth, they require a high tolerance for risk. Consequently, sector funds are best suited for plan participants who already have a well-diversified growth portfolio and want to pursue aggressive growth.

Employers, for their part, are responsible for establishing and implementing investment policies, periodically reviewing their investment plans, and providing ongoing retirement education to their plan participants.

Plan fiduciaries must also exercise care, skill, and prudence in selecting and monitoring plan investments. ERISA section 404(c) provides limited protection to plan fiduciaries. Fiduciaries must, subject to liability for failure, continue to disseminate information to participants and beneficiaries and monitor the performance of the plan investments and the benchmark for each vehicle. Even if a plan sponsor complies with the 404(c) regulatory provisions, the Department of Labor has taken the position that a sponsor retains liability for choosing and monitoring the investment options in the plan.

Plan sponsors should also establish procedures that satisfy their fiduciary responsibility. A thorough annual fiduciary review will consider plan compliance, plan fees, plan design, and recent legislation.

Attracting Employees

Employers should consider redesigning their traditional qualified pension plans to give employees greater control over the investment of their account balances. Employers can communicate their benefits through the Internet and printed materials. Nonqualified deferred compensation plans can also encourage long-term employment. Furthermore, employers may want to look into telecommuting, flexible hours, flexible work schedules, casual dress, on-site childcare, employee participation on plan investment committees, and part-time work, all as means to attract and keep skilled employees.

Employers can also look into additional benefit offerings, including dental and vision coverage, chiropractic, long-term care, mental health benefits, infertility benefits, lifestyle coverages, and group casualty and property insurance, including auto coverage and homeowners insurance. Benefits alone may not attract new employees, but having a benefits package that is not competitive is a further disadvantage in recruitment.

Investment Advice

Employers should avoid providing individualized advice or assistance to plan participants and beneficiaries about the selection of investment vehicles. Employers who do not retain a registered investment advisor should consider adding a disclaimer to the materials they provide, stating that the information is not intended to be specific investment advice and that participants are urged to seek advice from their own investment consultant.

Rendering investment advice may raise issues under the Investment Advisors Act of 1940. While it is unlawful for a person to be an investment advisor without registering with the SEC, providing a description of the investment alternatives available under the plan is not, in all likelihood, investment advice.

However, under certain circumstances, providing certain information (for instance, regarding investment strategies or specific and individualized advice to participants) may make the employer or plan fiduciary an investment advisor subject to registration.

Managing Fiduciary Responsibility. Plan sponsors should establish and follow guidelines for investment policy, participant education, and legal compliance. Although ERISA expressly permits trustees and other fiduciaries to appoint investment managers, plan fiduciaries have sole responsibility for monitoring plan operations. ERISA allows a plan to purchase liability insurance to protect plan fiduciaries as long as these fiduciaries remain accountable to plan participants. The enforcement mechanism of ERISA provides participants and beneficiaries (as well as the secretary of labor) standing to sue plan fiduciaries for damages.

Qualified Plan Design

Employers need to consider both defined benefit pension plans and defined contribution plans. Although the nation has seen unprecedented growth in 401(k) defined contribution plans, defined benefit plans may become increasingly important to an employee's financial security. Employers must consider an aging population, a need to make significant contributions to create sufficient retirement income accumulations, and the recent repeal of the aggregate benefit limitation.

Cash balance plans, a hybrid of defined benefit and defined contribution plans, are more attractive to younger workers who would accrue greater pension credits earlier in their careers. In addition, 401(k) plans should include a meaningful employer matching contribution, as well as automated telephone enrollment and customer services systems, interactive website access, and ongoing investment education.

The 401(k) service model available to plan sponsors has changed dramatically. In the new paradigm, an employer can choose among thousands of investment options, and the range of services includes multiple fund platforms and specialized servicing for asset classes such as company stock. The new 401(k) model also allows for the use of full-service benefit consulting firms with flexible product lines that are seamlessly integrated for delivering administrative and investment advisory services.

Technology Solutions. In addition to employees enrolling in their qualified plans using an automated voice response system or over the Internet, employers' websites can easily provide links to benefit vendors and provide benefit education and investment advice. Technology advances also enhance benefit offerings and save time and money by permitting employers to outsource benefit tasks.

Group Health Care

Although managed health-care arrangements and low inflation rates have contained health-care costs, costs are expected to escalate over the next few years. Benefit executives need to closely monitor the services provided by, and the costs relating to, their health-care programs.

Many benefit executives use a participant-directed defined contribution approach for all retirement and welfare benefits. Increasingly, employers permit employees to direct the allocation of their benefits dollars under cafeteria plans for welfare benefits and under 401(k) and other defined contribution plans for retirement dollars. Employers and health-care consultants need to effectively purchase health coverage, obtain vendor performance quantities, and share costs with employees to minimize the impact of increased health-care costs. Employers also need to review their benefit offerings and revise their plan design and administration to compete in the new millennium. *