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Make your Internet 401k plan appeal to employees through a checklist.

Offering the right number of options and taking a multi-faceted approach to education are the keys to increasing employee participation in 401(k) plans.

As 401(k) plans gain in popularity, human resource and benefits managers have two concerns: educating employees about company plans and ensuring that there are a variety of good investment options for employees to choose from. Companies not only want to provide good plans, but they want satisfied employees who know how to make their 401(k) plans work best for them.

EDUCATING EMPLOYEES

According to four financial advisors, employee education must be an ongoing process with a variety of methods: seminars, printed materials, videos, software and, now, the Internet or intranet.

A workshop - with visual aides - might be 45 minutes to two hours; it could be done at lunchtime or at department or staff meetings. Some firms handle this with their own HR department.

Many companies use outside vendors to run their workshops, taking some of the burden off HR. For example, if Fidelity Investments administers the 401(k), representatives come in and do the training as part of the vendor relationship. Other companies use outside educational firms, such as KPMG Peat Marwick, Hewitt Associates and Price Waterhouse; some go to colleges and hire business professors to do the training.

While there has been little Department of Labor (DOL) enforcement in this area, there is concern that having the vendor do the education could create a conflict of interest under the ERISA laws. Giving specific investment advice is a prohibited fiduciary transaction, so if a company brings in a provider who gives specific investment advice - which is subject to interpretation - the company could conceivably be held in violation of the terms of the plan. This summer DOE issued new guidelines to clear up confusing areas about providing investment information to employees.

A study by the Employee Benefit Research Institute (EBRI) showed that print works well in convincing people to participate, but it's less effective in convincing them to think about their investment decisions. Workshops are good for the unsophisticated; the sophisticated love computer software.

With so many educational goals in mind, savvy employers are using several methods to target their audience. Rather than using paper descriptions, many firms send their employees videotapes or a software disk. It can be cheaper to send tapes or disks, but not all employees realize that. Patterson suggests sending the materials with a note, explaining that they are easier to work with and less expensive than glossy brochures.

Instead of sending everyone a tape, Veeneman recommends sending everyone a postcard telling them about the video and where it's available. "Put a 30-second message on a postcard, catch their attention, and direct them elsewhere, like to a Web site. The problem with print is getting the employee's attention among all the other communication."

Employers are beginning to put their 401(k) materials directly on the Internet or on their internal intranet. Employees can go into their own computer or to a specific kiosk and call up information about the company retirement plan. These programs can be personalized; employees type in their name and PIN number and find out how much money they have in their 401(k). Or, with an interactive program, employees can go through retirement planning by asking questions (asset allocations? savings? rate of return?). This program also shows past rates of inflation.

Although the Internet's potential for 401(k) education has barely been tapped, it is not likely to replace workshops. Instead, they will exist together. Some people don't like computers, and some don't like sitting in a room. Some prefer the privacy of a screen, while others enjoy group interaction.

Until recently, security concerns kept many people from considering Internet access. Companies felt their internal networks were secure enough, but the big issue has been letting employees dial in from the outside. That whole issue has subsided since SSL (secure sockets layer) has convinced people the Internet is secure enough for doing transactions.

401k Tips:

Traditional 401(k) plan vendors did not think much about approaching smaller companies until recently, and did so then only because they recognized that the larger-company market was pretty well saturated. When they did turn their attention to the smaller and mid-sized plan market they were well prepared with a library of useful educational materials for potential and actual plan participants. Participation is participation, after all, whether it is in a plan with 50 participants or 50,000. One small company, Target Laboratories (www.targetlab.com), has built more employee loyalty by setting up a company-wide401 (k).

NUMBER OF 401k OPTIONS

Once employees know the difference between a stock and a bond, a major part of 401(k) education is informing them what options their plan offers. For the sophisticated, answers about how and why those specific options were selected should be available. But what is the right number of options?

FEAR OF LAWSUITS

Almost everyone agrees a proliferation of options can lead to confusion, but some companies may worry about potential lawsuits from disgruntled employees unhappy with their options or returns. Under the 404(c) regulations, companies can provide as few as three investment options and be protected from liability, but concern persists.

Companies need to have an investment policy for their plans: a statement of intention from the investment or pension committee and a statement that they are selecting funds to meet those goals. There must be an ongoing annual review - with set criteria for how the funds are evaluated.

RESPONDING TO EMPLOYEE REQUESTS

Many large companmies have six options in its 401(k) plan and is currently looking at new vendors.

About 19,000 members are in Dow's 401(k) plan (overseas employees are not eligible), which offers a stable value fund; Dow stock, an employee stock ownership plan; a growth fund, a custom-blended, noncommercial fund; an international fund; treasury money fund; and an index fund.

When A company changed its pension plan last January, employees started paying more attention to their projected retirement income. The company offered three four-hour financial planning seminars run by Price Waterhouse. The free seminars were scheduled at different times and were open to spouses. At the seminars, employees received a retirement planning software disk. The company also uses newsletter articles and a voice response system, which it's considering complementing with the intranet. The company is planning targeted mailings to certain segments, such as nonparticipating employees or those participating at a low level.

When a newsletter article invited employee suggestions for improving the 401(k) plan, almost all replies came from managers or professionals. The company did not hear from its average employee - a high school graduate working in a the company plant. Decisions about adding more options are being made by a multifunctional team with people from communications, HR and finance. When new options are added, there will be a big communications push.

CUSTOMIZED 401k COMMUNICATIONS

IBM has a large 401(k) plan with 180,000 accounts. Approximately 100,000 of them are for active employees.

"A plan sponsor has the fiduciary responsibility to select suitable funds for its population and educate them on the differences of the funds," says Don Sauvigne, program director of retirement and capital accumulation programs for IBM in Mt. Pleasant, N.Y. "A proliferation of options could be confusing. That's why plan sponsors need to be prudent in their design and to provide continual education. So that you're not just responding to the needs or interest of the sophisticated user. You need to make sure you're not sacrificing the needs of the majority."

IBM offers eight different investment options: an S&P 500 fund; a small cap fund; an international fund; an IBM stock fund; a money market fund; a fixed income fund; a bond fund; and a balanced asset fund.

"We have a good spread of funds, but not so many that people will be overwhelmed," says Sauvigne. "We are looking at adding some more in the future. When we add those, we will be very thoughtful in adding them to respond to the needs of our population at that point in time. Five years from now, it may not be the same thing."

Participants receive a quarterly four-page newsletter developed for the 401(k) plan, a joint effort by IBM consultants, the finance people and the HR people. "It's not an off-the-shelf newsletter," says Sauvigne. "It is written specifically to our plan and educates people about the eight funds and how they work and it highlights activities of our participants."

IBM also offers Personal Financial Planning, a series of group seminars for employees and spouses, provided by American Express Financial Advisors and Merrill Lynch. About 20,000 people have attended those workshops on all aspects of financial planning.

A service center, including an 800 number with dedicated personnel, helps employees manage their funds and make transfers. Managed by Bankers Trust, the service center, does not advise or educate, but makes sure participants understand the plan.

IBM is updating its financial planning software, which contains all the company benefits or retirement plans and can be accessed by employees at work or at home. The software is being developed internally with assistance from Bankers Trust

Can you increase the average deferral of your workforce while also lowering the company's cost? Possibly. Experience has shown that employees will defer as much as 6 percent of their pay in matches. So offer to contribute 25 cents on as much as 6 percent of pay, for a maximum annual cost of $15,000.

Additional non-profit websites that include relevant unbiased information about 401k plans include: www.mutualfund-401k.com.

2. USE FORFEITED MATCHES TO ENHANCE EMPLOYER CONTRIBUTIONS.

It's standard practice to require a period of participation in a 401(k) plan before employer matches are vested. Invariably, there will be employees who leave the company before they have become fully vested.

Many employers distribute those forfeited dollars among remaining plan participants, which does nothing to promote greater employee participation in a plan. Instead, use the forfeitures to pay for part of the company match. Knowing that there will be a certain number of forfeitures over time, you can increase the match under the plan. This increase should result in greater participation by non-HCEs, thereby making possible higher contributions by HCEs.

3. MINIMIZE NONPRODUCTIVE PLAN PARTICIPATION BY PROVIDING FOR ONLY TWO ENTRY DATES PER YEAR.

Companies that experience a high turnover or are in seasonal businesses find many workers contribute little or nothing to 401(k) plans. These low levels of participation depress the average deferral percentage, restricting the contributions of HCEs.

But with only two entry dates a year, the average eligibility will be 15 months because for every employee who enters at 12 months, another will be coming in after 18 months. The net result will be fewer new participants in any given year, easing the downward pressure on the company's average deferral percentage.

Adopting these three techniques will enable your HCEs to set aside more tax-advantaged retirement dollars.RRP

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