Observers predict that small companies will account for almost all the 401(k) plans initiated in the coming years -- this despite government mandates that have made 401(k)s less freewheeling and more expensive, and have forced employers to choose their plans more carefully. No one wants federal watchdogs second-guessing employees' investments, so companies look for administrators that will take an active role in teaching employees to make wise choices. Of course, that comes with a price. Here's a look at two growing companies -- why they decided to offer 401(k)s and how they balanced cost and service.
TGV, an internetworking software company in Santa Cruz, Calif.; six years old; $20 million in revenues; 80 employees. Its plan was established July 1, 1994; is administered by Fidelity Investments; and offers seven funds to choose from and a 25% company match. The plan cost $10,000 to set up; annual administrative fees are $9,000.
"Our profit-sharing plan was limiting. It was 100% company-funded, and sometimes we were kicking in 15% in a lump sum at the end of the fiscal year," explains chief financial officer Gary Valenzuela. "With a six-month waiting period to join and a five-year vesting schedule, it was hard for employees to visualize the payoff. The 401(k) benefits are immediate. Employees know that their money starts working now."
Though the price is high, Valenzuela is satisfied with the plan administrator, citing "tremendous" investment flexibility, timeliness of statements, and an investment newsletter that's heavy on generic advice, rather than ads for the firm's services. The administrator conducted lots of up-front employee education that paid off in more than 90% participation.
Victorian Papers, a greeting-card catalog in Kansas City, Mo.; seven years old; $4 million in revenues; 80 employees. Its plan was established January 1, 1994; is administered by American United Life Insurance, in Indianapolis; and offers an interest-bearing account, a money-market fund, and eight other funds to choose from, ranging from very aggressive to conservative, and a 100% company match. The plan cost $500 to set up; annual administrative fees are $450.
"About 60% of our workforce is in production -- a high turnover area. We thought a 401(k) would get them to hang on a bit longer," reasons CEO Randy Rolston. "We chose a loaded fund because its costs are at the end, which forces employees to stay involved yearlong."
Rolston got his benefit cheap. "We shopped some of the 'big guys,' and their annual fees were astronomical -- almost as much as what we were putting into the entire fund itself." The trade-off for the low cost: the administrator did only a "pretty good job of selling employees," he says. "At first we got mixed reactions from employees, but the participation rate -- about 50% -- is growing." -- Reported by Karen E. Carney* * *