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New Trends in 401(k) Plans

A growing number of U.S. employers now realize that offering a standard 401(k) plan may not be enough to hold the best employees. Employers in tight labor markets need to offer a strong 401(k), and that means a hefty employer match, some first-rate investment options, and an education program designed to help employees maximize their returns. Although employers are still concerned about controlling 401(k) costs and avoiding legal liabilities, the real focus now is on maximizing plan performance and using the plan to retain talent. AlliedSignal Inc. sets the standard for 401(k) plans designed to create wealth and draw top people. In a recent survey of 401(k) plans conducted by USA Today, the AlliedSignal plan was ranked the “most generous.” The plan matches employee contributions dollar for dollar on the first 8% of pretax pay for employees with 5 or more years of service. The employer match is 50 cents on the dollar prior to 5 years. The maximum employee contribution is 17%, pretax or after tax, and the plan offers 11 investment options. Participants can change their investment choices daily. The real cincher is that the employer match is in AlliedSignal stock, the value of which has grown more than 500% since mid-1991. Through the 401(k) plan, AlliedSignal employees are now the largest single group of shareowners, with 12% of outstanding stock. Since 1991, their collective account has grown by $2.1 billion, or roughly $50,000 each. Of the employees considered non–highly compensated (less than $80,000), AlliedSignal has 35 millionaires, 1,200 half-millionaires and 4,000 quarter-millionaires. Allied also offers a pension plan to help tie employees to the organization. Not every employer can offer a 401(k) plan that turns employees into millionaires, but many employers have discovered that they must offer something more than a 25-cent match and three investment options if they want to keep the employees they need. To stand out in the crowd, a 401(k) should shine in five key areas: