PLANO, Texas - Attempting to be more competitive and persuade participants to diversify, J.C. Penney Co. Inc., Plano, has split off part of its $3.2 billion 401(k) plan, dramatically increased investment options and added investment advice.
In the split, Penney's created a separate 401(k) plan for Eckerd, its drugstore chain, with about 11% of J.C. Penney's total 401(k) assets.
John Walton, retirement plan delivery manager for the parent, said the change makes Eckerd's plan more competitive with other 401(k) plans in the drugstore industry. Unlike J.C. Penney's match, which is based on profits, most plans in the drugstore industry guarantee a matching contribution. So, the Eckerd 401(k) plan has immediate vesting and a guaranteed match, on a sliding scale depending on the employee's deferral rate, which can be up to 6% of pay.
Participants in both plans now have 23 investment options to choose from, up from five. Online investment advice is provided to both plans by Financial Engines, Palo Alto, Calif. Hewitt Associates LLC, Lincolnshire, Ill., remains administrator and record keeper, he added.
Before the changes, much of the plan's assets were in its interest income fund. The plan has an automatic enrollment feature, with a default deferral rate of 3%, and the default investment option is the interest income fund, Mr. Walton said.
"It's like inertia. Associates don't tend to change, and (they) leave all the money in the interest income fund," he said.
J.C. Penney executives decided they needed to entice employees into better diversifying their accounts by offering a broader range of investment options, Mr. Walton said. "We're very pleased with the amount of people who have moved into the new funds. It's going to far exceed our projections," he said.
Company officials projected that 2% to 3% of total plan assets would move into the new funds by the end of the year, and the plan already has reached that goal, he added. Even so, Mr. Walton acknowledged, "it's a slow process."
J.C. Penney expanded the plan's investment options because its employees, known as associates, asked for a bigger selection, Mr. Walton said. The plan had offered three lifestyle portfolios, an interest income fund and a company stock option.
The current investment options are organized into three tiers. The first has a set of lifestyle portfolios managed by State Street Global Advisors, Boston - aggressive, moderate and conservative - and the SSgA Horizon Fund, which invests about 70% in bonds, 25% in U.S. common stocks and 5% in non-U.S. stocks. The lifestyle funds were offered previously; the Horizon Fund is new to the plan.
The second tier offers company stock, the Interest Income Fund and a set of index funds managed by SSgA: the Standard & Poor's 500; Russell 1000 Growth; Russell 1000 Value; Russell 2000 Fund; Morgan Stanley Capital International Europe Australasia Far East; and Lehman Intermediate Government/Credit bond index portfolios.
The third tier has a set of mutual funds: Fidelity Dividend Growth and Diversified International; T. Rowe Price Blue Chip Growth, Small Cap Value and Small Cap Stock; American Century Growth and International Growth; Vanguard Growth Equity and Equity Income; AIM Aggressive Growth A; and Dreyfus Founders Discovery.
Some 40% of plan assets are invested in company stock, in either the common stock or preferred stock funds; the preferred stock is left over from an old leveraged employee stock option plan, which is now part of the 401(k). Participants have purchased 17% of the stock currently in the company stock option; the remainder is from the LESOP or the company stock matching contribution, Mr. Walton said.
For the last two years, employees have been able to move out of the company stock match immediately. The preferred stock must be held until age 55 before it can be transferred, but there is a guarantee of a $30-a-share floor, he explained.
Although the company's matching contribution has always been in stock, this year J.C. Penney issued the stock used for the company match rather than buying it on the open market, he said.
Since the revamped plans were unveiled, J.C. Penney and Eckerd employees have been diversifying their accounts, he said.
The T. Rowe Price small-cap value fund and the Russell index funds have been doing well, Mr. Walton said. "Associates are doing a good job of picking out some good accounts and getting themselves diversified."
Financial Engines has assisted employees in making their selections. As of April 18, some 7,400 J.C. Penney and Eckerd employees have logged on Financial Engines' website; 160,000 employees are enrolled in the plans, he said.
J.C. Penney and its record keeper, Hewitt, launched the changes with a communications blitz. They ran articles in "JCPeople," the company's in-house publication, and made videotapes for individual stores.. In February, employees received mailed welcome kits. There also was a satellite broadcast on April 16 about the new features.