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Computing a better plan

HP uses merger to improve DC plan

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Merging: Gretchen Tai said the new plan includes the best options from the HP and EDS plans.

Hewlett-Packard Co. executives have revamped the company's $14 billion 401(k) plan, eliminating mutual funds as standalone options, offering more separate accounts, dropping stable value and lowering fees.

The restructuring followed Palo Alto, Calif.-based HP's acquisition of Electronic Data Systems Corp. and the merger of the two companies' defined contribution plans.

“We wanted to take the best of both worlds,” said Gretchen Tai, director of investments, describing her company's decision to use some of the investment options from each plan.

Rather than require participants in the $3.7 billion EDS plan to accept the choices offered in the old $10.3 billion Hewlett-Packard plan, “it was always our philosophy that the best options of the different plans would be preserved,” Ms. Tai said.

The planning, execution and employee-education effort took time. Although Hewlett-Packard closed its purchase of Plano, Texas-based EDS in August 2008, the consolidated plan took effect at the beginning of 2011.

HP officials spent the time in between not only analyzing the elements of both DC plans but also developing a strategy to reduce costs, consolidate record keepers and reduce redundant options.

HP has achieved “significant savings” by consolidating providers and using the combined plan's size to negotiate lower fees, said Ms. Tai, who declined to quantify the savings. For some investment options, Ms. Tai said HP uses the same managers for its DC plan as its defined benefit plan, but she declined to identify the managers or the assets they manage.

(The DB plan has assets of more than $10 billion, representing the combination of the separate HP and EDS plans. The old HP plan was closed to new employees at the end of 2007; the EDS plan was closed to new employees at the end of 2008.)

The combined 401(k) plan has 19 investment options available through five tiers. By contrast, the old Hewlett-Packard plan had three tiers of options with 29 investment choices; the EDS plan had four tiers with 15 options.

“We wanted it (the combined plan) to be simple to understand but also to have sufficient diversification,” Ms. Tai said. “The key is not the number of choices — it's the kind of choices.”

From the EDS plan, HP imported a self-directed brokerage window and passively managed investment options. From the old HP plan, the company included actively managed core options as well as “extended choice” opportunities to invest in Treasury-inflation protected securities or long-term bonds.

5 tiers

The tiers and their options are:

  • Tier I is a custom target-date option pegged to an individual's birth date rather than to a projected retirement date. “People find it easier to understand,” said Ms. Tai of the birth-date link. “Most people don't think about retirement; they think about their age.” The old HP plan also offered a custom target-date option linked to participants' birth dates. The EDS plan offered three balanced funds but no target-date funds.
  • Tier II is a group of six actively managed core options — money market, short-term bond, core bond, large-cap equity blend, international developed and emerging equity markets, and a small-midcap equity blend. “Most of the underlying funds are separate accounts, but not all,” Ms. Tai said. ”Each investment option we offer is an asset class managed by multiple managers of different styles.”
  • Tier III is four passively managed options — core bond, large-cap equity blend, international developed and emerging markets, and small/madcap equity blend. These options are separate accounts. All are run by a single manager, which Ms. Tai declined to identify.
  • Tier IV offers “extended choices.” These are long-term bonds, TIPS, global real estate, emerging markets equity and commodities. Most of these options are separate accounts; some are collective trusts. Another extended choice is company stock. Hewlett-Packard places a 20% limit on company stock in a participant's account, but larger balances that existed prior to the creation of the combined 401(k) plan were grandfathered in, Ms. Tai said. In aggregate, company stock represents less than 6% of the 401(k) plan's assets.
  • Tier V is a self-directed brokerage window with 8,500 mutual funds. The EDS plan had a brokerage window; the old HP plan did not. The company drew the line at offering exchange-traded funds and individual stocks in the brokerage window, said Wendy Sergeant, manager of accounting and operations. “Our plan design emphasizes buy and hold,” she said. “ETFs were reviewed, and, at least for now, we've decided not to include them.”

Although both the old HP and EDS plans offered stable value options, the consolidated plan does not. Ms. Tai said stable value was dropped because executives were concerned about the rising cost of wrap fees — the insurance that guarantees investors will receive book value for the collection of bonds in the stable value funds. They also were concerned about availability of wrap insurance in the marketplace and about restrictions on certain investment choices required by wrap contracts, she said.

Among other options dropped: nine U.S. large-cap equity funds — seven from the old HP plan and two from the EDS plan. “We eliminated five managers and added two new managers in the (combined plan's) U.S. large cap equity fund,” Ms. Tai said. She wouldn't identify the managers.

When plan executives decided to create a consolidated 401(k), Hewlett-Packard also chose a single record keeper, Fidelity Investments. Fidelity was HP's record keeper and J.P. Morgan Retirement Plan Services LLC was EDS'. The company issued an RFP, and both were among the five finalists.

Ms. Tai added that HP executives continue to look at other investment options. “We monitor managers' performance on an on-going basis and will replace managers when we no longer have the conviction that the manager can outperform in the future,” she said. “In this restructuring process, however, it (the choice of managers) was mostly a design fit issue.”