SAN FRANCISCO - Chevron Corp. broadened the investment options in its $4.5 billion profit-sharing/savings plan.
The new options affect the approximately 30%, or $1.3 billion of plan assets, of which participants have discretionary control. The balance of plan assets remain invested in company stock, under the provisions of the plan.
The changes epitomize the latest trends in defined contribution investment management and administration. They include:
-Creating two actively managed equity options that invest in unitized shares of defined benefit plan portfolios;
-Continuing to use indexed commingled funds for the six core options, thus offering less expensive management fees than retail mutual funds;
-Using a mutual fund window (with an extra annual fee of $50) to give participants access to 2,000 mutual funds from 200 fund families; and
-Moving to outsourced, daily valued record keeping; it had been internal and quarterly. This brings customer service levels closer to those of a retail mutual fund environment. Company officials also negotiated reduced fees for a range of other participant services.
While the number of options were increased to 10 from five, Chevron officials decided to keep the number of core options limited, rather than offer a potentially confusing array of choices. Chevron now offers nine core options and a mutual fund window.
Chevron maintained its policy of offering low-cost, indexed, commingled funds for its core options.
Existing investment manager State Street Bank & Trust Co., Boston, was selected to offer two more indexed, commingled options - an international equity index fund based on the Morgan Stanley Capital International Europe Australasia Far East Index and a small-capitalization fund based on the Russell 2000.
Four indexed commingled funds, managed by State Street Bank, were carried over to the new plan - a money market fund, a domestic bond fund, a diversified equity fund and a balanced fund.
Mellon Trust, Boston, the plan's trustee, will continue to administer the Chevron company stock option. State Street Bank also is providing the mutual fund window option through its brokerage division.
Some employees have complained they could pay less for a similar mutual fund selection in the retail world, but Cliff York, senior adviser, qualified plans, said he doubts they could get such a broad selection of funds. "They are paying a premium for the convenience of getting all these funds under one roof, but it's entirely their choice," he said.
Although many employees requested information kits about the mutual fund window, Mr. York said Chevron anticipates perhaps 4% to 5% of employees will use the window.
The plan's new value equity option invests in the unitized shares of a defined benefit plan portfolio managed by Sanford C. Bernstein & Co., New York. A growth equity option invests similarly in a portfolio managed by Jennison Associates Capital Corp., New York.
"We're giving our employees access to active equity management at a very good price," Mr. York said. "We negotiated a pretty good deal on investment management fees for the value and growth equity options for the profit-sharing plan by leveraging the managers of our defined benefit plan." Chevron's defined benefit assets total $4 billion.
Chevron did not change the contribution formula or restrictions on employee transfers of company stock.
The plan has a 98% participation rate because employees have to contribute only 2% of salary (pre- or post-tax) to get a matching 2% contribution from the company, Mr. York said. There is an additional profit-based employer contribution made quarterly, which has averaged about 4% in recent years.
Both the employee contribution and the profit-based contribution go into Chevron stock and are locked into that option.
As a result, about 70% of total plan assets are invested in Chevron stock. Participants only have investment direction over the fixed 2% company matching contribution.
But Mr. York said about 40% of the assets that participants have discretionary control over are still directed to company stock.
"Our new, more intensive investment education programs for participants describe the importance of asset diversification and show by example ways participants can invest the retirement assets they control," Mr. York said. "But we haven't concentrated on getting employees out of company stock and aren't offering advice. We are presenting the alternatives and letting participants draw their own conclusions."
As for the move to outside record keeping, Mr. York said, "there was no way we could keep up with the technology demands of internal record keeping, especially in a daily valued environment."
Mr. York said employees had expressed a strong desire for the level of customer services available through a mutual fund company. That included daily pricing, an automated voice-response system that could handle asset allocation transactions and a wider selection of funds.
Rather than continue to chase technology advances, Mr. York said, the staff conducted a search and sent requests for proposals to a small list of companies with the prerequisite technology capabilities. Chevron selected State Street Bank.
"By going with an outside provider for record keeping, we are getting the advantages of State Street Bank staying on the cutting edge of technology, rather than trying to maintain that edge ourselves," Mr. York said.
State Street Bank has assumed all record-keeping functions, is providing a transaction-based voice-response system and is working closely with Chevron staff to provide employee communications and investment education. Nearly all plan processes are now paperless.
Mr. York said all 20 Chevron staffers directly involved in record keeping who wanted to remain with the company have been redeployed.
Price Waterhouse L.L.P., New York, was the systems consultant during the conversion process. The new plan design became operational Aug. 26.
Chevron still is finalizing the criteria it will use to gauge participant satisfaction, a benchmarking practice used increasingly by large plans. Mr. York said State Street Bank agreed in principle to the concept of reduced service fees if plan service suffers, but both parties are still figuring out the best measure of customer satisfaction.
"Just applying a criteria, such as an operator answering a phone call within some prescribed time period, might not be the right gauge. Maybe it takes longer to answer the call, but it leaves a participant perfectly happy. We're still working on the methodology," said Mr. York.
Plan communications and investment education were enhanced. Employee meetings, videos, payroll stuffers, e-mail broadcast messages and articles in the company's benefit newsletter all were used.
Chevron's ultimate goal, said Mr. York, is to move to total benefit outsourcing for all of the company's benefits and health and welfare plans.
An internal team will likely continue a search it began some time ago for such a provider in January.
