Two of the nation's biggest corporations are restructuring their 401(k) plans following mergers, and they are taking widely different approaches.
Verizon Communications Inc., Stamford, Conn., on Nov. 17 will unveil a $21 billion defined contribution plan executives view as the best of the plans of Bell Atlantic Corp. and GTE Corp., which merged last year to form the new company. The new plan will have 21 investment options.
ChevronTexaco Corp., San Ramon, Calif., on April 1 will combine the 401(k) plans of its predecessor companies, Chevron Corp.'s $5.5 billion plan and Texaco Inc.'s $2 billion plan. It tentatively has selected a three-tier approach, said David P. Smay, general manager-benefit plan investments. One tier will have nine funds from Vanguard Group, Valley Forge, Pa.; a second tier will have what might be another 20 to 40 funds provided by Vanguard and other managers; and a third tier will be a mutual fund window, allowing participants to chose among some 3,000 funds.
Shutting window-type option
Verizon executives opted not to include an open investment window-type option.
"Twenty-one investment options is probably enough for most people," said Ellen J. Roxby, director of investment operations, Verizon Investment Management Corp., which was formed by merging the asset management units of Bell Atlantic and GTE. "We felt that a self-directed brokerage or mutual fund window was not appropriate and would be confusing."
By contrast, ChevronTexaco's Mr. Smay said, "We wanted to offer participants the option of a broad choice," hence the mutual-fund window.
Verizon participants will be able to move money into the new plan Jan. 1.
"We decided to go into new strategies on the investment side and make sure there were enough options for 404(c)," the safe harbor fiduciary protection," Ms. Roxby said. The new options include a three-tiered strategy using investments from existing defined benefit money managers. It includes a set of lifestyle funds, pooled investments, both active and passive, offering a wide array of asset classes, and a set of brand-name mutual funds.
Most of Bell Atlantic's $14 billion plan's investment options were passive; GTE's $7 billion 401(k) plan had more aggressive options.
GTE had outsourced the record keeping to Fidelity Investments, Boston. Bell Atlantic outsourced record keeping to Unifi Network, a division of PricewaterhouseCoopers, Fort Lee, N.J., said Ms. Roxby, who directed the external international equity program at GTE before the merger. Fidelity Investments will handle the record keeping, communications and education for the new plan.
Verizon executives also were concerned with keeping costs down.
"The bulk of the defined contribution plan costs are on the participants and not the company, and we wanted to make sure we are competitive," Ms. Roxby said. She said the fees are competitive but wouldn't specify the amounts.
At the same time, Verizon wanted to leverage its experience from merging the two companies' defined benefit plans, completed early this year, she said. "We were looking for strong, risk-adjusted performance."
Verizon executives also tried to ensure that employees would be comfortable with the new plan by incorporating passive and active strategies, a variety of asset classes and some brand-name mutual funds that are in the old GTE plan. (Bell Atlantic's plan does not include mutual funds.)
"We did not want employees to feel we were reducing their choices," she said.
The investment menu will be divided into three tiers. One tier will contain a set of five lifestyle strategies ranging from 100% fixed income to 100% equities, most of which will be managed by a "small subset" of Verizon'sdefined benefit plan managers, Ms. Roxby said, but she would not specify which managers are handling which options or identify any other providers because the plan hasn't been unveiled to participants. The defined benefit plan managers are: INVESCO; Mellon Capital Management Corp.; Morgan Stanley Investment Management; J.P. Morgan Fleming Asset Management; and Grantham, Mayo, Van Otterloo & Co.
"We trying to leverage our knowledge and understanding of our pension plan managers so the employees and participants in the savings plan get the same benefits as in the pension plan," Ms. Roxby said. "There is no manager in the defined contribution fund who is not also providing services in the pension fund."
The second tier will have asset class pools representing a wide variety of asset classes and including passive and active strategies, she said. There will be no mutual funds in this tier.
The third tier will have six brand-name mutual funds. Half will be with one provider and the remaining three will be with three different providers.
"Some people like mutual funds. Some people like to look them up in the newspaper and on Morningstar, even though, generally, they can be more expensive," she said.
Explaining to employees
The costs of each investment choice will be made clear to participants in an extensive communication and education campaign scheduled to be launched next month, Ms. Roxby said.
"We will give employees returns and costs, and employees can make their own decision," she explained.
While she would not reveal what it is, the company match was changed. Issues that the human resources side may consider in the future include whether to add investment advice.
"At this point, we're going with what we have," Ms. Roxby said. "We have an extremely comprehensive and long-range communications and education program planned."
ChevronTexaco, meanwhile, selected Vanguard as record keeper and as primary investment manager for the combined 401(k), which will have $7.5 billion in assets, Mr. Smay said.
For the first tier, Vanguard will provide nine investment portfolios. Six of those will be passive funds: Standard & Poor's 500; total market; small-cap; international equity; bonds; and balanced. The other three funds are active value, active growth and money market.
For the second tier, the company expects to offer some 20 to 40 other mutual funds. Depending on how many funds it puts in the tier, Vanguard might provide 10 of them, while the rest would be provided by other mutual funds companies.
For the third tier, it will offer the mutual fund window. Chevron had a similar window in its plan; Texaco did not.
While the participants will have an easy way to transfer between options in the first and second tiers, Mr. Smay said transferring funds in and out of the third tier will be more complex, requiring at least an intervening step of using a money market fund between the switches. In addition, he said, participants will have to pay $50 annually to access the mutual fund window.
No brokerage window
Mr. Smay said the company decided against offering a brokerage window that would allow participants to invest in individual securities, citing in part potential liability for the added investment risk of such specific investments.
ChevronTexaco's financial and human resources staff worked on the restructuring with the assistance of Frank Russell Co., Tacoma, Wash., said Mr. Smay, who was manager-investments and actuarial overseeing Chevron's pension funds before the merger. They considered only Vanguard, which has been the Texaco 401(k)'s record keeper, and CitiStreet, Chevron's record keeper. They didn't do a broad search because both companies had done searches a few years ago.
Chevron's plan, aside from the mutual fund window, offered nine investment options, including seven provided by State Street Global Advisors, Boston, one of the partners in CitiStreet. The other two options were an active value fund, managed by Sanford C. Bernstein & Co., and an active growth fund, managed by Jennison Associates LLC.
Texaco's plan offered only five options, provided by Vanguard, and some other money managers.
He said ChevronTexaco also is considering hiring a third-party education firm, which could provide education and investment advice. Neither or the original plans had third-party providers. It is already evaluating the education firms.
Mr. Smay said the restructuring proposal is tentative, which company executives expect to complete in about a month.