Cover | Published in December 2000

Meet the Innovators

Retirement plan innovation has many faces. PlanSponsor gives center stage to several of them.

By Carol Schwefel | December 2000

Retirement plan innovation has many faces. PlanSponsor gives center stage to several of them.

It is all too rare that executives who make pension and benefits decisions get the recognition that they merit. As Plan Sponsor Editor-in-Chief Charles Ruffel notes in his editorial comment this month, the powers-that-be are apt to take exemplary plan performance for granted until there is a lapse in such performance.

Our intent is to honor some of the unsung heroes of the retirement community. In our second annual Innovators series, we illuminate the achievements of four plan sponsors whose accomplishments have graced our pages over the past 12 months. What is so groundbreaking about the pensions and benefits strategies at GMIMCo, Deloitte Consulting, Zhone Technologies and Merck & Company?

Power player: GMIMCo's Allen Reed

How a smooth-as-silk Tennessean iced a $22 billion liability, and gave General Motors' participants the best defined contribution plan money could buy.

Six short years ago, General Motors was facing down a pensions car wreck. Liabilities dwarfed assets to the tune of $22 billion. It was America's most underfunded plan, and the Pension Benefit Guaranty Corporation's biggest headache.

On July 1, 1994, Allen Reed, then treasurer of Hughes Electronics, quit the fast track at the aerospace giant and moved from Los Angeles to New York to take over General Motors Investment Management Corporation. Under his stewardship, GMIMCo has transformed itself. Innovative financial engineering, using the stock of Hughes, which GM ultimately acquired, and of its former subsidiary Electronic Data Systems, helped to balance assets and liabilities. A finely tuned process of picking and monitoring investment managers has produced consistently above-par returns, so much so that GMIMCo intends to wholesale its multimanager funds to other plan sponsors. GMIMCo was also among the first plans to unitize its entire investment chain, in the process offering 18 new 401(k) options, mirroring its defined benefit funds, directly to participants.

Much of the credit has to go to GM itself. America's largest corporation has always taken its pension obligations seriously, with a penchant for paternalism that has served its employees well. And the seriousness of the problem posed by the apocalyptic underfunding was such that GM management was prepared to give a free hand to any agent of change. That said, there is little question that Reed was the architect of the turnaround. Born and raised in Nashville, Tennessee, Reed worked his way through engineering school at Auburn University by laboring every odd year at Delta Air Lines, where he progressed from a "ramp rat" to the Atlanta company's treasury department. While at Delta, he scratched out his MBA at Georgia State at night, which helped persuade management to steer him to the pension fund and, thus, to the role of assistant treasurer. He found that he relished the investment world, so he tried his hand at the buy side, working as a principal at the Atlanta firm of Allen & Associates. But, he "missed the big picture," so, when he was offered the chance to run Hughes' pension plan, he jumped at it. At Hughes, Reed set up a separate asset-management operation, rose to treasurer and, increasingly, became involved in M&A, where, to his dismay, he found that he was able to spend less and less time on investing.

In the spring of 1994, Hughes CEO Michael Armstrong walked into Reed's office brandishing a Wall Street Journal story that said that GM, Hughes' parent, was looking for a successor to then-head of GMIMCo Gordon Binns, and "there was my name heading up the list of candidates," drawls Reed. "Gordon had asked me if he could put my name on the list, and I had said he could do anything he wanted but I wasn't going to come to New York under any circumstances. But, there was Mike Armstrong waving the story in my face and telling me to make up my mind. So I got on a plane to New York to find out how I had been put in this position. And, to my surprise, I found that the job was worth moving to New York after all."

It was the biggest job a plan sponsor could wish for. The pension assets (now some $100 billion) were sufficiently huge—and the liabilities that much larger—that GMIMCo demanded an extraordinary talent to run it. "Whether GM wanted to be in the asset-management business or not, they were in it," says Reed. "So, if they were in it, they might as well figure out how to do it as well as they possibly could."

The first step to do it as well as it could be done was to transform GMIMCo from a pension fund into an investment management organization. That meant, among other things, a compensation program quite different from anything else at GM—and not just for senior executives but for every single GMIMCo staffer. The cultural shift Reed was looking to complete was profound—to institute a performance-based metric that was entirely transparent and objective. The key, says Reed, was to focus on adding basis points. "Fifty basis points on the type of money we hold is a huge amount—and I believe that people get creative about earning basis points when they understand exactly how winning an extra basis point affects their own compensation. Set the targets, make it clear what people are accountable for and, then, they start to behave like you want them to behave," he says.

Prior to Reed's arrival, GM's pension assets had performed much in line with industry benchmarks. But, like many plans, consistency was not its strong suit, and years of overperformance alternated with years of underperformance. To Reed, consistency was all—he wanted above-par performance from his management team, and he wanted it every year. GMIMCo executives were not rewarded any more significantly when a manager blew the lights out than when a manager beat its benchmark by a respectable margin—essentially, Reed was looking to discourage rewarding undue risk-taking. "With our liabilities, we couldn't afford a hit-or-miss mentality," says Reed.

And, it worked. From mid-1995, the ups and downs that had characterized GM's excess return (whether negative or positive) began to dissipate (see chart below). In the period to mid-2000, the fund experienced only five quarters of negative alpha, as opposed to 16 quarters of positive alpha, most of which came in at between 0.5% and 1%.

Much of this stability comes from process, Reed says. And that process is largely a function of intelligent analysis of investment managers, and then allocating assets in line with that analysis. "If the manager you hire is going to do the job for you that you want, you had better have a basis on which to measure it," says Reed. "So, we need to define the process by which a manager manages money, set an expected excess return, establish a tracking error, and then monitor the progress."

The steady accumulation of above-market returns may have endorsed Reed's process, but, in and of itself, it barely dented the liabilities that faced both of GM's pension funds. Then, in the fall of 1995, after hard negotiation with the Department of Labor, GM transferred some $6 billion of EDS stock, representing 25% of that company's outstanding float, to the GM hourly pension plan, comprising almost 20% of its assets. It turned out to be a masterstroke, with benign tax consequences—thanks to the DoL's special dispensation, the unrealized gains of EDS stock were never taxed. Reed appointed an independent fiduciary—US Trust—to deal with the singular situation by which GM's pension had become EDS' largest shareholder and to begin to work the fund's exposure to EDS down to palatable levels. This year, GM repeated the strategy, again with DoL sanction, this time with Hughes stock. By mid-2000, both the hourly and salaried plans had moved into overfunded status: The liabilities that once threatened the very existence of America's largest employer were just an unsettling memory.

Reed then turned his attention to GM's defined contribution plan. It made little sense to him that the painstaking process by which investment decisions were made on the defined benefit side had no impact on the automaker's 401(k) plan participants, where choices were limited to a few core options and a Fidelity mutual fund window. To Reed, the solution was obvious: Package the defined benefit options in such a way that they could be made accessible to 401(k) participants. The best way to do that, Reed decided, was to unitize every investment in the defined benefit plan, so that each manager was operating on the same common platform, regardless of the particular job it was hired to do. As a consequence, GMIMCo was able to supplement options in its now-$25 billion 401(k) with 18 investment options transported from the defined benefit plan, all composed of multimanager funds branded under GMIMCo's Promark label, and all characterized by low expense ratios. Participants have gravitated to these Promark funds at the rate of $250 million a year, recognizing both the quality of the funds and their institutional pricing.

Unitizing can be an administrative nightmare, not least because it requires daily calculation of net asset values for each fund. But, GMIMCo took unitizing as an opportunity to recast its administrative relationships, and moved from four to two custodians for the pension fund. "Despite unitization, our absolute administrative costs went down in 1998," says Reed. "We got a lot more out of our custodians, and we got it for less."

Not only did unitization allow GMIMCo to offer more product at defined benefit levels of price and sophistication in its 401(k) plan, it set the stage for Reed's next task: to transform GMIMCo from a buyer to a seller. Even Reed's admirers say this will be a challenge, as success in asset management is as much a function of marketing as investment skills, and marketing skills are not core to GMIMCo's DNA, which has always had the luxury of being a buyer, not a seller. But Reed's confidence is infectious, and his record is tough to bet against. GMIMCo already manages some $10 billion for Delphi Automotive Systems, a GM spin-off, and like assignments are anticipated. "I believe we have put in place here everything that an entrepreneurial business needs to succeed. I want to look back in five years and say that we succeeded in building an investment management business here," he says. "I'd like to think that, wherever I have gone, I have built something better. That's my nature."

Thus far, at least, Reed seems to have the full support of GM behind his ambitions. Nor does the enormity of the challenge daunt him, not least because he remembers a suffocating summer in Nashville as if it were yesterday. "The hardest I ever worked in my life was as a stock boy packing truck clutches under my father's eye in his auto parts company," says Reed. "Compared to that, any challenge I face here is easy."

A running start

A fledgling firm's soup-to-nuts benefits strategy is designed to get employees in the door and keep them in the "Zhone"

Talk about starting off on the right foot. Telecom newcomer Zhone Technologies seems to have mastered a lesson some companies never quite learn: how to give its people the benefits they want and need. One can hardly blame employees at the Silicon Valley startup for opting to beef up their core benefits package with low-cost legal and financial planning services—or for scooping up the other perks Zhone is offering at a discount: e.g., dry-cleaning pick-up and delivery, grocery shopping services, and even pet insurance. Benefits are paid for via payroll deduction. For busy tech professionals, this is just what the doctor ordered.

Zhone officials give much of the credit to Laura Larsen, Zhone's director of compensation, benefits, and systems. Last spring, months before the company would mark its first anniversary, Larsen conducted an online survey to determine what additional options employees would add to their existing core benefits package, if they could. Zhone was already providing them medical, dental, and vision insurance, not to mention a 401(k) plan and some unusual basic plan features like assistance with immigration law and working visas.

After only 10 days, says HR vice president Gary ZiesŽs, "We basically pushed a button, and voila! The employees had spoken and we had their answers in 'real-time,'" with the aid of Elustra survey software.

Next, Larsen consulted with Zhone's overall benefits broker, Benefits Planning & Insurance (BPI), in Larkspur, California, to help it select a vendor that could provide its employees with various work/life benefits to supplement the core program. The idea was to allow workers to view and purchase these optional benefits on-screen. While the Web would enable Zhone's people to enroll from virtually any locale, it was also important that the benefits be accessible to an employee population spread over roughly a dozen locations around the globe.

How was all of this coordinated within the space of just 15 months? It came down to the ideology of Zhone chairman and CEO Mory Ejabat: Get all your ducks in order "before the growth really hits," says ZiesŽs. It was not much of a wait. Zhone got started with nine people and $500 million in funding and an experienced senior management that came from Ascend Communications, a multibillion-dollar company that Lucent Technologies acquired last fall. Zhone has grown to 500 employees in just over a year, and spread out operations from headquarters in Oakland, California, to offices in Minneapolis; Boston; Eatontown, New Jersey; Italy; Belgium; Canada; China; Singapore; and the United Arab Emirates.

What Zhone most wanted to avoid was the disorganization that ZiesŽs considered a hallmark of Ascend's approach. True to its name, Ascend grew rapidly over a short period to 3,800 employees, according to ZiesŽs—but without payroll, finance, and benefits infrastructure firmly in place. As ZiesŽs recalls, "We were always chasing after the train."

Enter RewardsPlus, whose RealLife work/life benefits program affords Zhone employees the choice of name-brand vendors that deliver services at group discount rates and, frequently, around the clock. RewardsPlus, in Baltimore, Maryland, also handles administration and payroll deduction billing arrangements for RewardsPlus benefits. Included in Zhone's benefits smšrgasbord are mortgages and home equity loans from institutions like IndyMac Home Bank and Prism; legal services and insurance from Legal Club of America and LegalWise; financial planning and education through Ernst & Young; and pet insurance and pet owners savings programs from Veterinarian Pet Insurance and Pet Assure.

For example, a Zhone employee in need of legal counsel could access Legal Club of America and retain the services of one of its 16,000 participating attorneys for extended legal consultation or court representation—all for a maximum fee of $75 per hour. The national average for comparable service is $184.

Voluntary benefits via the RewardsPlus program become effective for Zhone employees beginning on January 1, 2001. Participants will be able to view plan options from any PC at their leisure, says Larsen. "One of my biggest frustrations is that, as a new hire [elsewhere], you get this 10-pound pack of paper that is never complete, and that leaves you wondering, 'Where do you start and what does it all mean?'" Instead, she says, Zhone employees can focus on "real benefit questions, like, 'What should I be doing now or in the future, and how do I get there?'"

Moreover, "401(k) updates or plan changes, with our very flexible underpinning and electronic enrollment, don't tax [our benefits staff] or the system to implement, so we can add features throughout the year," notes ZiesŽs, simply by updating the master electronic file that holds the benefits program and options, and "burning some more CDs."

"The benefits program has been a huge success when it comes to attracting and retaining people," Larsen says. The proof of the pudding: "We just hired a new VP and general manager," says ZiesŽs. "He picked up the CD on my desk and said, 'This thing is fantastic. I took it home, I was able to go through it, my family was able to go through it, I had all the information I really needed, and it was all right on here. This is really a great tool for me.'"

50-somethings: the best and the brightest

Deloitte Consulting's inspired phased retirement program offers senior partners their dream jobs With 77 million US baby boomers fast approaching retirement age and only 45 million 25- to 34-year-olds lining up behind them, it is time for companies to sift for solutions to the workforce gap. At least, that is the way Deloitte Consulting CEO Doug McCracken saw it three years ago. As head of the firm's Americas practice at the time, he told a small group of top managers—including Alexander "Sandy" Aird—that, "fundamentally, the firm is growing so quickly on a global basis, we have a desperate need to retain our brightest and the best of our mature partners for various leadership and innovative roles around the world," recalls Aird. McCracken admitted to a "terrible fear that, as we continue to grow and as they hit their mid-50s, they are suddenly going to be in a net-worth position where they will look at options away from the firm."

Reality hit hard: An estimated 40% of its 850 partners will be older than age 50 in 2003 and eligible for benefits from the Deloitte 401(k) plan and the firm's cash balance pension plan. Hence, the genesis of the firm's Senior Partners Program, a phased retirement plan devised to stem a potentially devastating brain drain.

The taskforce McCracken had assembled settled on a solution enabling several partners with outstanding records—and who were at least 50—to carve out a second career for themselves within Deloitte, or to work in the same position but at a less hectic pace, allowing them more time and space for personal fulfillment, while remaining on board at the company, says Aird.

Before the rollout, Deloitte road-tested the program: A US partner, Dan Gruber, who was deemed a superb professional, had decided "for personal reasons to reduce the amount of time he spent working for the firm, and to take more time to do some other things with his life and family that would be more personally fulfilling." And, so, a one-off agreement was negotiated with Gruber allowing him to spend 60% of his time with the firm and still be fully recognized as a partner. "Beginning with the kernel of an idea," says Aird, "we conceived and presented the idea to the firm, saying, 'If we can do it for Dan, there's got to be a way that we can formalize this so that other partners who hit the wall that Dan hit could have an opportunity within the firm to do something quite different.'"

Aird then volunteered to chair the Selection Committee that evaluates candidates for the elite group. In 1999, the first eight Senior Partners, including Gruber, were announced—six from the Americas and two from abroad. True, there is, says Aird, "no contract, no demand upon the partners, in return for the designation, that they commit 'X' number of years to us. We hope that, by being part of the program and having a very strong say in what their going-forward role is, that will be enough to encourage them to stay in the firm."

That said, Aird emphasizes, "this is not a sinecure." Senior Partners are expected to meet performance standards that are set mutually and reviewed each year. "These people are expected to add great value to the firm in their new roles."

That is not lost on the partners, who execute their appointments distinctively. For instance, there is Bob Campbell, who really wanted to devote most of his time to developing the firm's presence with a single client: the federal government.

John Everett, in the London office, opted to work with one very significant client—the Post Office in Britain and its executives and board—and then take his two or three remaining years to develop relationships with London-based cultural organizations.

"I think it's going well," says Aird. "We're providing [Everett] with support so he can position himself, and we're providing support for the organizations, as well." Meanwhile, in New York, Charles Biggs devotes himself to solidifying Deloitte's relationships with a major US investment banking client, while spending a good deal of his time on mentoring up-and-coming partners in the firm.

An additional feature of the Senior Partners program: "At any point in time, if they become frustrated or go through a mid-life crisis, we encourage them to come back to the committee and we'll work it out with them," says Aird. That means partners in their 50s, having done most of the mentoring of up-and-coming partners, will now be mentored by their colleagues to help them achieve their personal goals.

The program also provides Deloitte's 25- to 34-year-olds with an incentive to seek senior partner status. "We are also working hard to make sure that it becomes truly a global program," says Aird.

As for himself, this Toronto-based Deloitte alum maintains a "fairly active outside career." Officially, he retired two years ago, yet he is senior advisor to the firm and continues to chair its Senior Partners Selection Committee, as well as chairing the Toronto Hospital for Sick Children, and handling a number of other outside directorships.

Man and machine

Some sponsors provide online investment advice. Others opt for the personal touch. Merck does both.

Yogi Berra said that, "If you don't know where you're going, you'll end up somewhere else." Merck & Company is darned if it will allow participants in its $3.8 billion 401(k) plan to steer a course for retirement without the right tools.

The company strongly believes in providing both face-to-face and online investment advice to help employees navigate the financial planning maze. Merck feels that its menu of services has saved employees great confusion—while bolstering its plan enrollment to just under 25,000 salaried and hourly employees, reflecting an enviable 95% participation rate.

First, Merck taps Ernst & Young's certified financial planners. The Ernst & Young services that Merck staffers can access range from conversations with a CFP using a toll-free 800 number, to more in-depth, face-to-face meetings with financial planners and accountants. Meetings can take place at the offices of Ernst & Young or at Merck. Whether a participant is a highly compensated executive or an hourly employee, she controls the nature and the amount of advice she receives. Fees are funded by plan participants, via payroll deduction, according to the level of service sought. Merck's arrangement with Ernst & Young means that participants, confronting noninvestment matters like tax- and estate-planning, college funding, and charitable giving, can choose resources according to their personal goals, rather than having to use a preformulated package.

In any given year, more than 10% of plan participants will take advantage of these services, say Merck officials. Last year, after 30 days of pilot testing to make sure employees grasped the software concept, Merck also began offering its salaried plan participants the services of Financial Engines Investment Advisor at no charge. Currently, 50% of Merck's salaried plan participants utilize the software and, based on its popularity, the company extended the Financial Engines advice option opportunity to its hourly workers this year.

"Employees have even brought their spouses in to company locations on weekends to use the software together and, in many cases, have been able to make important decisions that have a big impact on their financial futures," says Howard Hoe, a former auditor with Merck's corporate audit group who took the reins from Wayne Folkart as Merck's manager of executive benefits last February.

"In 2001, we will be rolling out enhanced features in Financial Engines to our employees," says Hoe. At the same time, Merck is gearing up to increase its 401(k) investment options to 22 from 16.