Something interesting has been happening to Dell Computer Corp.'s 401(k) plan of late. Participation this year soared to 83 percent, compared with 52 percent in 1996. New employees enroll at the rate of 91 percent. With so many more employees participating, Dell is passing its deferral and contribution discrimination tests for the first time. In the past, failing those tests required senior management and other highly paid employees to give back contributions to their accounts, which, needless to say, did not sit well with chairman and CEO Michael Dell.
The market decline notwithstanding, the generally stellar performance of Dell stock could be triggering this response among the rank and file, since the company uses it to fund its 401(k) match. But it may be no coincidence that since December 1997, all employees have had online access to their 401 (k) account information.
Dell certainly believes that such access has had something to do with the rise in employee interest in its 401(k). Going online has "increased participation because employees can visually monitor their accounts. We've had a fantastic response from employees," says Lisa Cummings, director of global benefits at Round Rock, Texas-based Dell, the $12.3 billion (revenues) computer maker with 13,500 U.S. employees.
Welcome to the latest trend in 401(k) plans: do-it-yourself online information and transactions. Lately, such companies as Oracle Corp., Lotus Development Corp., and Compaq Computer Corp. have been giving employees the option of logging on to check balances, model loans, switch investments, and change contributions. Nontechnology firms, too, are venturing into cyberspace to keep employees informed about their defined contribution plans. Warner-Lambert Co., a pharmaceutical and consumer-products company; Public Services Electric & Gas Co. (PSE&G), an energy company; and Medtronic Inc., a medical-devices company, have 401(k) sites as well.
"Online access clearly is becoming a major feature of 401(k) support," says Ted Benna, president of the 401(k) Association, a 401(k) advocacy organization in Cross Fork, Pennsylvania. In 1997, 13 percent of plan sponsors said they offer access to plan data via the Internet, according to a survey by Spectrem Group, a consulting and research firm based in San Francisco. Among the largest firms, with plan assets in excess of $200 million, 28 percent said they plan to add the service. Adds Karina Istvan, a consultant with Cerulli Associates, in Boston: "It's a natural extension of the Internet."
PSE&G's Internet site, designed by consulting firm Hewitt Associates LLC and launched last September, provides an astonishing range of information and services to the utility's workforce. Included as part of an overall employee benefits site, the 401(k) page allows participants to view account information, complete most transactions (with the chief exception of loans), and track and graph the performance of the plan's six funds. There are some financial basics, such as a primer on risk and reward, and fund descriptions. When users click on the financial modeling tool, it automatically delves into the account and updates the participant's investment status. The tool takes into consideration everything: the defined benefit pension plan, the cash balance plan, and any private investments. "So they get a complete picture of investment and savings for retirement or any other purpose," says Dick Quinn, director of performance and rewards at PSE&G, in Newark, New Jersey.
Like the voice-response systems (VRSs) that preceded it, online 401(k) programs have a lot to offer plan sponsors. At a minimum, online access helps reduce phone calls to the human- resources department. "We've seen a drop in number and length of calls coming in to HR and the benefits service representatives," says Reggie Hall, communications practice head for William M. Mercer Inc. in Dallas. "Before, when people had questions about loans, et cetera, they needed a live body. Now those questions are answered by the Web."
Aside from start-up costs, Internet sites can be less expensive than VRSs. "Our costs are about half," Quinn says. "When someone calls the VRS, we pay for every minute they're on the phone. The Internet costs just $1 no matter how long the participant stays on." Start-up costs aren't even outlandish. PSE&G paid less than $200,000; Dell paid about $35,000 to Mercer for a customized 401(k) application. "Peanuts," Cummings says. If a company signs on with such providers as The Vanguard Group or Putnam Investments, there's no cost at all.
With Internet and VRS access, employers can design an almost paperless environment. "In five years, an awful lot of 401(k), health, and pension information will be provided on line," says Scott Macey, senior counsel with Actuarial Sciences Associates, an employee benefits consulting firm in Somerset, New Jersey. "Some material may need to be printed, but you won't have the fancy, bound, printed material that can cost $25 or $50 per person."
Perhaps the greatest potential lies in the Internet's ability to provide ample education and portfolio modeling to plan participants. That may go a long way to soothing the participants' anxiety about making wrong investment decisions because they lack knowledge. "My goal is to educate colleagues so they can retire comfortably," says Beth Carvalho, administrator for savings and financial-services plans at Warner-Lambert, in Morris Plains, New Jersey. "I think the Internet will help us achieve that."
Education has become a greater concern as more and more employees depend on 401(k) plans to see them through retirement. More employees participate in 401(k) and other defined contribution plans than in defined benefit plans, according to the Department of Labor. And defined contribution assets are expected to grow at a 12.5 percent rate over the next five years, Spectrem reports.
Unfortunately, many participants are still in the dark when it comes to investments. Hewitt found that 59 percent of large companies responding to a 1997 survey offer some investment education, but even with this support, participants make common mistakes: investing too conservatively, failing to diversify, or investing with a short-term focus.
Because sophisticated online applications permit users to create what-if scenarios, employers hope these programs can rectify some mistakes. Most sites dramatically and graphically demonstrate that low contributions and risk-averse investments produce robin- sized, not ostrich-sized, nest eggs. What's more, programs use the participants' own numbers to prove it. Users indicate how much they're saving monthly and their current age, and with a click of a mouse they see how much they'll have at age 65. Not surprisingly, it often isn't enough. So participants have the opportunity to adjust the values up and down-- saving more money, picking different returns-- to see how these factors affect savings. Quinn sees a gradual shift from fixed-rate funds to more long-term investment choices.
Sites provide the familiar staples of printed materials--pie charts of typical portfolios based on risk and the age of the investor. But online programs can provide hyperlinks to glossaries and short articles that supplement available information. "There's a lot more information at your fingertips than if you were sitting at home with paperwork in front of you," Mercer's Hall says.
With easy online information, participant behavior does change, insists Joanne Laipson, director of human resource services at Lotus, in Cambridge, Massachusetts. As a technology firm, Lotus is committed to use of the Internet, and 100 percent of its employees have access to a personal computer. But Lotus also sees an online 401(k) service as a way to give employees resources to maximize plan benefits, since the 401(k) is the only pension savings vehicle offered.
To drive home the point, Lotus dubbed its Web site www.dontblowyourretirement.com. It's a fun site, with investment basics, a savings calculator, plan details, and fund prospectuses, all done in hip graphics. It links to plan provider Putnam Investments. And since it went live in January, it seems to be doing the trick. Says Laipson: "There's been an uptick in participation from slightly below 80 percent to slightly above. There's better utilization of the company match." Another improvement has been more-aggressive investing by Lotus's younger employees. "Many of our 30- year-olds were in fixed-income funds. We've seen some moving away from that," she says.
True, it's hard to know whether to attribute such change to Web sites or the investment seminars many sponsors offer. But the Internet does make it easier to provide personalized investment advice. At least three investment advisory firms now market online 401(k)- specific financial-planning help (see sidebar, below). While a few intrepid sponsors have signed on, most employers believe such services risk the protection from fiduciary liability they're afforded by regulation 404 (c) of the Employee Retirement Income Security Act. "We're careful about giving advice," says Cummings of Dell. "Everything is reviewed by an outside counsel. We're comfortable giving descriptions of funds, portraying typical portfolios, but not more."
The Legal Issues
Surely more would follow suit if the Department of Labor gave its blessing. So far, however, the DOL hasn't provided any formal guidance on that question, or on others raised by the migration to online information access, although the Taxpayer Relief Act of 1997 requires the DOL and Treasury to develop regulations on the use of new technology. Both departments are concerned that the needs of computer-illiterate employees might go unheeded. They want all participants to receive full disclosure, such as summary plan descriptions, which must be issued when participants enroll and when plans are materially modified.
The IRS issued a call for comment in July, while the DOL is working on issuing safe- harbor regs by year's end. Robert Doyle, director of regulations and interpretations at the DOL, says so far the department is comfortable as long as sponsors furnish participants with electronic 401(k) summary plan descriptions in the same manner they furnish group health plan descriptions. That means sponsors must make sure participants actually receive the descriptions, that the electronic description does not conflict with the written version, and that any participant can request a written version. One other proviso: For retirees and beneficiaries, you still have to go with paper.
"To be absolutely safe, you have to go with paper, but that's not always a good answer," advises Mary Ann Arlt, a vice president and consulting attorney with Actuarial Sciences Associates. "If you can provide access to a computer to all employees, make sure they know how to get to it, and that they can print it out, then put it on line."
Dell's approach might be a good one to emulate. It has between 15 and 20 workstations available in each manufacturing facility, and workers are trained to get onto the Web. The 150 to 200 new employees who start work each Monday at Dell are introduced to a computer on their first day. After a morning briefing on benefits, including a one-hour 401(k) presentation, clusters of 30 or so newcomers go to a computer lab, sit down at PCs, and enroll in all benefits online. That's one reason new recruits enroll in the program at a 91 percent rate.
If the Web site is available on the Internet, employees can log in at home. Of the 10,600 workers at PSE&G, 4,000 have Internet access at their desks. But the benefits site gets 8,000 hits a month. If they don't have at-work access, "their spouse or 14-year-old kid does," says Quinn. The number of Internet- capable households is expected to rise to an estimated 41.6 million in 2001, from some 22.3 million estimated this year, according to Forrester Research Inc., in Cambridge Massachusetts.
Regulators also are likely to consider whether current rules regarding notification of plan changes are still valid in an online environment. Companies now have a maximum of 210 days after the plan year to notify participants of plan changes. But "there is an urgency over the Internet that doesn't exist on paper," Arlt says. "So even though a company has several months to report changes, the expectation will be that you must report the change immediately."
On the positive side, it's a lot easier and cheaper to refigure a few pages on the Web than to print and mail notices. "We update our site constantly," says Quinn. "If we add a fund, change a plan provision or description, we can modify the page in a matter of hours. It used to take weeks." And it quickly gets the word out to overseas workers. Different time zones and slow mail create huge obstacles for expatriates trying to manage their 401(k) programs. No such barriers exist on the Internet.
Online information may be more effective, too. "It is going to be a wonderful communication tool," better than the printed word, says Carvalho of Warner-Lambert. "When people come home from work, they face a pile of mail. When you link to the Internet, it's an in-your-face type of thing."
Although PSE&G's Quinn says employees call Internet access "the greatest thing since sliced bread," administration isn't entirely worry-free. Employers need assurance that data disbursed on the Web is timely and accurate and doesn't contradict information that can be obtained via VRS. Recordkeepers must be expected to maintain "a data warehouse," or a repository for system information that can be accessed by any means, according to Brian Mackey, partner in charge of retirement plan services at KPMG Peat Marwick in Boston. "The VRS, the source for written reports, and online information should come from one database."
Another fear is that online systems may not keep up with daily gyrations of the capital markets. Arlt says that when circuit breakers closed down the New York Stock Exchange in October 1997, participants didn't have an inkling as they posted changes in their investments. "They made trades, got confirmation, and were told later that the trades did not go through. They did close the next day, but this activity was Asia-related, and people were doing market timing." She advises employers to make sure participants know that trading can be closed.
Which brings up another point: Should participants attempt to time the market with their long-range retirement money? Most investment professionals say no, and easy online asset allocation may prompt novice investors to buy high and sell low. "There's an awful lot of evidence that when markets go up and down, individual investors do the wrong thing," says Jeff Maggioncalda, president and CEO of Financial Engines Inc., in Palo Alto, California, which sells online 401(k) advice via plan sponsors.
Investors will show cooler heads, thinks Catherine McBreen, practice leader of retirement services at Spectrem Group in Chicago. While her organization did not survey online participant behavior during last October's decline, it did record how it affected VRS activity. "The number of people calling in was large, but the number actually doing transactions was small," she says.
Remarkably, few employers believe Internet security is still an issue. Although Dell operates a secured trunk line between its intranet and its recordkeeper, Lotus is confident that standard 128-bit encryption will keep its data safe on an Internet-based system, which then can be linked directly to Putnam for modeling and transactions. Employees don't seem to have qualms. PSE&G asked its 10,600 workers if they wanted to block access to their records over the Internet. Only 13 did.
Loans continue to elude the programmers. "There are more legal complications," says Stuart Lewis, a benefits attorney with Silverstein and Mullens PLLC, in Washington, D.C. "There are some unresolved questions about whether loans require a separate written document, and many times you need spousal consent." But online sites allow participants to model loans and reduce the phone calls to the benefits department for answers. No evidence exists yet that the Internet encourages more loans, which ultimately hurt investors by reducing their savings. At Dell, loan modeling is the third biggest reason why employees log on, but the percentage of loans has not increased significantly.
The Minimum Standard
Small wonder that more and more plan sponsors are demanding online 401(k) information. At The Vanguard Group, one-third of new and prospective customers request Internet access, says Shelton Unger, a principal at Vanguard. For plan providers, Internet access now is a minimum standard. "To be a finalist, you have to be up and running on the Internet. Six months ago, it was OK to just have it in the works," says McBreen of Spectrem. Mutual funds, which recently captured the largest share of the 401(k) market--42 percent--are developing Internet 401(k) sites faster than banks and insurers, which have 21 percent and 22 percent of the market, respectively, according to Spectrem. Not only do the funds view it as smart marketing, but it's good economics, too. It's far cheaper to have participants key in enrollment information, beneficiary and address changes, and the like than pay a customer service representative to do it. One other plus: Because participants frequently link to the provider's site, it gives these firms a chance to hawk non-401(k) investments and services, particularly useful when participants roll over 401(k) plans when they leave or retire.
In the end, online 401(k) services make the Internet the ultimate self-service tool in a benefits world that is becoming increasingly self-service. The PSE&G benefits staff has been cut from 45 at headquarters and 25 or so in the field to just 9. "We're sending a new message to the workforce. We want them to be self-service," Quinn says. And the new workforce, weaned on ATMs and telephone answering machines, want instant answers to their questions, 24 hours a day. Too bad we don't yet know whether the Internet turns them into better investors at the same time.
----------------------------------------------- --------------------------------- Virtual Investment Reality
Let's face it: Employees want--and need-- specific investment advice. But the protection from fiduciary liability available under regulation 404(c) discourages sponsors from directing 401(k) investments. Some employers, like Pitney Bowes, in Stamford, Connecticut, get around that by permitting employees to use flex dollars to purchase general financial- planning advice. But personal advice can cost from $100 to $500 a pop, and in this market, most investors need continuing guidance.
Now three start-up companies are offering customized, online retirement planning advice that they claim is on a par with that offered by institutional money managers, but at discount brokerage prices. Two of these newcomers--401k Forum Inc. and Financial Engines Inc.--sell their services to plan sponsors. The third, Rational Investors Inc., works solely with plan providers, which then offer the product under their own name to sponsors. Either way, these firms say that because they are third-party advisers, they easily clear Department of Labor restrictions, at a cost of less than $50 per participant per year. So far, however, providers remain skeptical.
Here, in any case, is how it works. San Franciscobased 401k Forum provides participants with a password and a personal home page and directs them through a series of questions. After determining the participant's goals and time horizon, 401k Forum recommends specific investment allocations based on the plan's choice of funds. Participants can call up a side-by-side comparison of their current and suggested allocations to see how both portfolios fared over the past 10 years.
401k Forum uses the two-way communications capability of the Internet to its advantage. It sends participants E-mail every three months to remind them to update their allocations.
Financial Engines, in Palo Alto, California, takes a similar approach. It creates individual portfolios for participants by recommending that a certain percentage of their savings be allocated among available funds that it believes best suit their retirement needs, investment horizons, and risk tolerance, based on modern portfolio theory. It employs a statistical model of key economic indicators and their positive and negative effects on the markets. "You can't assume constant growth. The real question is which funds will get you to your goal with a degree of certainty," says Jeff Maggioncalda, president and CEO of Financial Engines.
While 401k Forum and Financial Engines have their own analysts scrutinizing mutual funds and stock, Rational Investors, in Cambridge, Massachusetts, uses third-party data (Standard & Poor's). Its portfolio modeling can be customized as needed by asset managers.
Blue Shield California, in San Francisco, has used 401k Forum since January. "This is a way for people to get quick access and easy, visible education without having to go through a seminar," says Suzie Hasselkuss, benefits administrator. She says she's confident that 401k Forum's third-party status keeps Blue Shield off the fiduciary hook for the consultant's advice.
With 52 percent of large companies offering company shares as a 401(k) option, how do these advisers handle the ticklish question of evaluating their clients' stock? "We don't give advice on individual securities, but we keep a profile on the stock and show returns over the years," says David Peckman, vice president of marketing at 401k Forum. "Then we reallocate the rest of the plan based on the company stock decision." Says Maggioncalda: "We model it like a mutual fund. We don't advise selling or buying. We'll tell you the risk of holding the stock and show how to diversify your portfolio around it."
As for fiduciary liability, Robert Doyle, the DOL's director of regulations and interpretation, reminds sponsors they have an obligation to prudently select advisers and to monitor them to ensure they're providing quality advice.
----------------------------------------------- --------------------------------- How 401(k) Sponsors Deliver Participant Service