he 401(k) turned 27 this year, and like any young adult, it went through its bad-boy phase, where guidance was absent, fees were high and solid investment choices were paltry. But over the last few years, more companies have helped the 401(k) and other defined contribution plans grow up by adding wise features like auto enrollment, auto escalation, default options and targeted investment advice.

    "The defined benefit plan was totally paternalistic," said David Wray, president of the Profit Sharing/401k Council of America, Chicago. "And then the initial 401(k) was totally nonpaternalist. What's happening is the defined contribution plan is now swinging in the middle between the two."

    Employees in 401(k)s are still ultimately responsible for their retirement security, of course, but forward-thinking companies are offering their workers more than bare-bones tools to make the most of these programs. They're implementing designs that make it easy for workers to get on the right savings track from the beginning. Although no company includes all of the best practices outlined below, some come awfully close.

More paternalism
    Not surprisingly, large companies with defined benefit plans—either open or frozen—tend to be more inclined to sweep their employees into auto enrollment, auto escalation and default investment schemes, which leave very little room to not do the right thing. Other firms are getting the hint, too, and 44% of them now employ auto enrollment, according to Hewitt Associates, Lincolnshire, Ill.

    Devon Energy Corp. of Oklahoma City gave employees the option to give up their pension plans and go into a "super 401(k)" this past year. Those who chose to stay in the defined benefit plan could still access the regular 401(k) plan, but employees who opted out would have one of the best offerings around, with generous employer contribution levels, auto everything and low fees. (To be sure, the aim is to reduce the company's future pension liabilities.)

    "Our sense was since we're going to this super 401(k), we're giving the employee flexibility and control over retirement, but we're also giving them responsibility," said Paul Poley, vice president of human resources. "If we're going to shift some of that risk, we had an obligation to better manage that risk."

    That's the conclusion that executives at AmeriHealth Mercy Family of Companies, which provides managed care to Medicaid programs, came to as well. In addition to the company's cash balance pension program, as of Jan. 1, employees were automatically enrolled in the 401(k) plan. Officials at Philadelphia-based AmeriHealth spent three months educating employees about the importance of retirement saving and how auto enrollment would work—then went ahead and implemented it anyway.

    "We really thought it was important for us to take that step," said Jeanie Hefferman, senior director of human resources benefits, adding that for many employees the cash balance plan wouldn't provide adequate retirement savings. "Our experience tells us that it's not that people don't want to save; they're just apathetic about it. So we figured we'd do it for them."

    There was a 14% increase in participation since the first of the year, Ms. Hefferman reports. One worker even wrote Ms. Hefferman a personal note to say that after working for the company for 13 years and not participating in the 401(k), the automatic enrollment forced her into the program.

More automation
    Companies vary on how much they should strong-arm employees. A typical approach is to auto enroll workers at the level where they are eligible for the full employer match. But some view that move as too intrusive.

    "Auto enrollment isn't a slam dunk for every company," said Robyn Credico, national director of Watson Wyatt's defined contribution practice. "It may get good participation rates, but you may lower the overall savings rate."

    Barbara Marder, global defined contribution leader with Mercer agrees. "What research has shown," she said, "is that if you just have auto enrollment and you bring people in at 3%, they may never change it."

    That's why when Con-Way, the freight transportation company based in San Mateo, Calif., froze its defined benefit plan and beefed up its 401(k) in January this year, company executives wanted to make sure employees were contributing a meaningful percentage. They set the amount at 6%.

    "In April 2007, when we told the employees that we were going to auto enroll them, we had an intensive communication campaign that went along with it," said Leslie Lundberg, vice president of human resources. Since then, Ms. Lundberg notes, the company has a 97% "stickiness" rate for assets staying put. Employees contribute an average of 7.5% of pay.

    When the switch to the new 401(k) plan happened, all employees—not just new hires—were subject to auto enrollment.

    The way to get employees up to the right contribution level, said both Ms. Credico and Ms. Marder, might be auto escalation features alongside auto enrollment. But plan sponsors sometimes shy away from telling employees to kick in even more if they've already auto enrolled them.

    Not AmeriHealth Mercy. "We time the [yearly] 1% increase on the heels of our merit cycle so people are less likely to opt out," Ms. Hefferman said.  

More contributions
    It doesn't take an advanced mathematics degree to know that the more money invested for retirement, the more available at retirement. Yet not all companies are able to offer significant amounts.

    The best contribution rates mimic those of traditional retirement plans.

    At IBM Corp., Armonk, N.Y., there is a three-tier contribution system. For employees close to retirement, the firm matches 100% up to 6% of pay plus 4% automatically, totaling 10%. For midcareer employees, the automatic contribution is 2% and new-to-IBM workers get 1%.

    Con-Way also makes contributions based on service: Employees with less than 10 years of service get 3% of pay, those with 10 to 20 years receive 4% and those with 20 or more receive 5% on top of the 50% match on the first 3%.

    "Because we were phasing out the pension plan, we wanted to make sure that employees still received the total retirement benefit they would have if the plan (had stayed in place)," said Karen Smith, Con-Way's manager of retirement plans administration.

    Devon Energy has one of the most generous contribution levels. On top of the 100% match for the first 3%, the firm also throws in 8% into the super 401(k) to sweeten the pot and encourages employees to abandon the pension plan.

More target-date funds
    Since the Pension Protection Act of 2006 designated target-date and lifecycle funds as qualified default investment alternatives, or QDIAs, money has been pouring into these vehicles. Target-date funds hold some $200 billion today, up from $103 billion in 2004, according to the Investment Company Institute.

    "A lot of [employer] investment committees want younger people taking on more risk and older people taking on less risk," said Steve Utkus, director of Vanguard's Center for Retirement Research, Malvern, Pa.

    Before the PPA gave the nod to target-date funds, most companies defaulted employees into money-market and stable value funds, which aren't considered aggressive enough for most workers.

    "The retirement-date funds are geared toward the person who doesn't want to mess around with making investment choices," said Ms. Lundberg of Con-Way. "We've used the target-date default option since 2005. Prior to that, it was money-market funds. Our investment committee recognized that a lot of people stayed in the money-market fund and never made a change."

    Ms. Lundberg estimates about 90% of new 401(k) money at Con-Way now goes into target-date funds from T. Rowe Price Associates Inc., Baltimore. About of a third of Con-Way's $1 billion in 401(k) assets are now in such offerings.

    Even with target-date funds, there's a good deal of tinkering from companies.

    "The big trend is customized target-date funds," said Ms. Credico of Watson Wyatt, though she notes it's mainly plans of $500 million or more that can afford to do so.

    Customized funds can take into account the characteristics of a company's plan participants. If the employer also has a pension plan, employees might be able to take on more equity risk in their 401(k) investments because of the pension's fixed-income investments.

    These funds are often compiled in-house using many of the same managers that companies use elsewhere in their retirement plans.

"If you've spent a lot of time picking your core funds, then when you pick a target-date fund, it's going to deteriorate over time as more employees move to the target date—then it loses its purchasing power," said Allison Borland, leader of Hewitt's defined consulting group.

More pension-like investments
    Devon Energy's 401(k) target-date funds are populated with many of the same choices that are available in the defined benefit plan.

"We wanted to make that access available in our 401(k) plan, which the typical plan doesn't have because you need a certain volume and size," Mr. Poley said.

International Paper Co., Stamford, Conn., leveraged its investment management expertise in a different way. International Paper created eight commingled funds in its 401(k) plan that replicate the investments in the defined benefit plan through a processed called unitization.

"For the investment managers, they're just managing a pool of assets," said Robert Hunkeler, director of investments, about the $4.5 billion plan. "They don't get involved as to whether these are pension assets or savings plan assets. Many of the managers we use in our pension plan do not offer mutual funds. This approach is certainly a more efficient way to offer our employees great investment choices than doing due diligence on a whole other group of fund managers."

More attention to fees
    If companies weren't concerned about keeping fees low, they certainly are taking up the cause now that regulators have trained their focus on the issue. In August, the Department of Labor issued a new proposal on fee disclosure in 401(k) plans.

    And several high-profile lawsuits alleging needlessly high fees are working their way through the courts, including suits fronted by Wal-Mart Stores Inc. and The Boeing Co. employees.

    Corporate executives are taking note.

    "Companies are benchmarking their fees to understand what they're paying and where they are vs. the market," Watson Wyatt's Ms. Credico said. "Then if they're paying over the market rate, they're revisiting the fund lineup first to see if there are less expensive options."

    To be sure, large companies, those with more than $500 million in their plans, are in a better position to negotiate with vendors because they bring such volume to the table.

    "But small companies that don't have economies of scale have to use expensive arrangements," Mr. Wray of the Profit Sharing Council said, adding that it's unusual to see a firm with less than $500,000 in plan assets run a plan for less than 0.30%, though 2% is fairly common as well.

    IBM, which is often referred to as the gold standard of 401(k) plans, charges its employees an average of just 0.10% in fees for their investment options.

    ExxonMobil, in Irving, Texas, goes even further. The fees on its 401(k) plan are an almost-unheard-of 0.01% for investments from Northern Trust. The firm picks up the administration fees, said a company spokesman.

More advice
    For years, companies shied away from anything that bordered on individual advice. Now, some 49% of companies provide advice, according to the Profit Sharing Council.

    The advice runs the gamut from online programs such as those offered by Financial Engines to managed accounts to face-to-face sit-downs with investment counselors.

    "Small companies tend to go for one-on-one advice," Mr. Wray said. "Larger firms typically use some kind of online or telephone method."

    The reason, Mr. Wray said, is that large companies often have workers in several locations. They want to make sure that advice is as consistent for a worker in Cleveland as for one in Des Moines.

    And advice is expensive. It can add up to one percentage point to overall plan expenses.

    Not all employers are quick to pick up the tab. IBM is, however. The technology giant launched a program called Money Smart that gives its 127,000 employees access to financial advice online, via telephone and in person.

    "It's an opportunity for every 401(k) participant to have a one-on-one conversation with a financial counselor," said Karen Salinaro, vice president of benefits and compensation with IBM.

    Employees can access planners from Ayco Co. LP, a subsidiary of Goldman Sachs Group Inc., and Fidelity Investments. IBM has committed to paying $50 million for the advice over the next five years.

    So far, about a quarter of the workers have used the service, according to Ms. Salinaro. About 4,500 calls a month are fielded.

    "From our perspective," she said, "it's been very successful."

    At Demco Inc., a Madison, Wis.-based maker of library and educational furniture and supplies with 400 employees, advice takes the form of one-on-one sessions. The company works with Michael Francis, a financial planner in Madison, who makes a presentation about retirement investing to workers. Then employees are encouraged to sign up for individual sessions.

    The advice adds 0.05% to 0.15% to a plan's overall costs, Mr. Francis said. Employees can utilize the service or not, but they're paying for it regardless.

—Crain's Benefits Outlook Online,  November 2008