NEW YORK - Some employers have to go well out of their way to encourage, entice and cajole their workers to defer some of their salaries in a company-sponsored defined contribution plan. Morgan Guaranty Trust Co.'s Gary D. Naylor, vice president of worldwide benefits, finds he has something of the opposite problem.
After receiving a personalized letter from Mr. Naylor on April 15 which explained how much they could save on their tax bills through salary deferral into the 401(k) option of the company's profit sharing plan, many non-contributing employees actually called Mr. Naylor directly to explain why they were not participating. A number of those employees joined the plan as soon as their circumstances allowed. In all, more than 500 employees signed up to make salary deferrals as a result of Mr. Naylor's appeal.
Such employee response is fairly typical, said Mr. Naylor, within a company that specializes in investment management and therefore has an employee universe fairly attuned to savings and investment.
The company's main retirement benefit is a $700 million defined benefit plan for its 10,000 participants, about 2,000 of which are retirees. The monthly valued $600 million Deferred Profit Sharing Plan for Morgan Guaranty Trust and affiliated companies is generally considered a supplemental savings plan, said Mr. Naylor, with some unusual features.
Every Morgan Guaranty employee receives an annual award, averaging about 15% of salary, with a mandatory distribution of 50% to the company's 35-year-old profit sharing plan and 50% in cash. Except for the annual bonus award, the company does not match employee savings contributions, but does pay all plan administration and investment management fees.
Changing demographics led the company to add a 401(k) element to the plan in 1993. Employees coming to Morgan Guaranty with lump sum deposits from previous jobs needed to invest, and rapid turnover meant employees wanted portability of their savings when they left the company. Many employees had 401(k) plans at other jobs and were already accustomed to deferring some of their monthly salary to such a savings plan. Employee focus groups also helped the company design a plan with features employees wanted. The plan segregates the employer annual award and employee salary deferrals into separate asset pools, which employees may allocate differently.
Morgan Guaranty weighted the plan to provide better savings opportunities for lower-paid employees by allowing a 15% maximum salary deferral for such employees, vs. an 8% maximum for higher-paid employees. Higher-paid employees also have the opportunity to invest in non-qualified savings plans through the company. The company's main objective in designing the plan as it did, said Mr. Naylor, was to make sure it easily passed discrimination testing.
Because Morgan Guaranty employees work in a financial services environment, they probably are much more sophisticated than an average 401(k) investor and can cope with - and indeed demand - widely diversified investment options, said Mr. Naylor. The profit-sharing plan now offers eight diversified commingled funds, including a small-company stock fund and an international equity fund, all managed by an affiliated company, J.P. Morgan Investment Management Co., New York. Towers Perrin Associates, New York, is the company's external record keeper.
In January, the plan will add an emerging markets fund. Because many of employees research emerging markets as part of daily business, they were especially sensitive to the potential returns and wanted such a fund for their own savings.
"As far as we can tell, we are one of the first defined contribution plans to offer an emerging markets option. This investment area has very high visibility among our employees, many of whom have been working hard themselves in these markets," said Mr. Naylor.
The company is developing a specialized international investing brochure to help employees understand the differences of investing in established markets and in emerging markets. "We see the need to explain very clearly the risks and rewards possible with emerging markets investing," added Mr. Naylor.
Even without a company match, Morgan Guaranty employees are taking advantage of the chance to save with the 401(k) plan feature, with 77% of the highly compensated employees and 63% of the non-highly compensated employees participating. Part of the success lies in the sophisticated investor profile of the company's employees, said Mr. Naylor, but much is due to education.
An Investment Information Center is manned by J.P. Morgan Investment Management operators to answer questions about asset allocation for the plan, in addition to the automatic voice response system provided by Towers Perrin. A monthly newsletter, provided by AYCO, New York, allows the company to communicate plan features and changes. An annual report to participants discusses plan features such as investment options in detail and compares their performance to that of other asset classes.
Two-day financial planning seminars are offered twice a month in the company's three New York City centers, where 70% to 80% of participants work. Seminars cover all benefit programs and show how pension and savings plans work with other programs to fund a comfortable retirement. An outside financial planner is brought in to educate employees. Popularity of the seminars make "logistics, trying to fit in all the people who want to see the program," the company's main problem, according to Mr. Naylor.
Employees have the opportunity to transfer assets between options once each month but don't appear to be market timing, said Mr. Naylor. Transfer volume averages only 200 calls a month. More frequent transfer capabilities (prior to 1993, employees could make changes just once each quarter) and better education have led employees to reduce investment in the conservative GIC plan option to 36% in January 1994, from 60% in September 1990.
Employees have been using similar asset mixes for both their profit sharing awards and their own salary contributions in the 401(k) option. The average asset mix for the employer award contribution in January 1994 was 20% company stock, 13% small-company stock, 14% international equity, 11% domestic equity, 14% balanced, 4% bond, 17% GICs and 7% in a money market fund. The average asset allocation for 401(k) assets Jan. 1 was 17% company stock, 17% small company stock, 16% international equity, 14% domestic equity, 16% balanced, 4% bonds, 11% GICs and 5% money market.
"There's a strong sense of trust in their employer among the Morgan Guaranty employees. We know from the market research we collect from our participants what they want and feel comfortable with. The bond of trust is so strong for our employees that many elect to leave their 401(k) and profit-sharing assets in the plan, even after they retire. We are finding that the greater majority of these retirees continues to allocate their assets to GICs, but that notwithstanding, are not moving their money out of the plan," said Mr. Naylor.
Because a high proportion of employees leave their assets in the deferred profit- sharing plan after retirement, Mr. Naylor said plan officials are evaluating a new product just introduced that allows an employee to permanently roll over defined contribution assets on a tax-free basis into their defined benefit plan. If Morgan Guaranty introduces the service, the Additional Lifetime Pension, employees would receive a lifetime monthly payment, as would their spouses, set up as a fixed benefit or variable annuity.
