Verizon on alternatives edge

Adds absolute return and private real estate to 401(k)

By Jenna Gottlieb

Posted: April 30, 2007, 6:01 AM EST

Verizon wanted to help participants ‘earn pension-like returns,’ said David Beik.

STAMFORD, Conn. — Verizon Communications Inc. added private real estate and absolute-return investment options to its 401(k) plans for salaried employees, making the telecommunications company the first non-financial plan sponsor offering the alternatives to plan participants.

Verizon is in a league of its own, said Martha Spano, senior consultant for Watson Wyatt Worldwide, Washington. Defined benefit plans — which are considered more sophisticated with investments — only are “now starting to add private equity to their lineup; for most DC plans, it’s a trend about 10 years off,” she said.

Verizon Investment Management Co. added the strategies — plus a new emerging markets equity investment option — to the $9.5 billion business and management 401(k) plans in the first quarter. The emerging markets option is being unitized from the company’s defined benefit plans, said Michael Riak, director of Verizon’s savings plans.

“From the Verizon Investment Management side, we wanted to fill in the investments available to participants and to give them the opportunity to earn pension-like returns,” said David Beik, executive director for investment management at company’s money management unit, which oversees investments for Verizon’s $62.6 billion in total retirement assets. “We wanted to help avoid the situation where DC plan participants are too conservative.”

The changes were made following Verizon’s decision to freeze its $39 billion cash balance plan for management employees in June 2006.

Verizon’s move is history-making, consultants said. William Schneider, managing director at DiMeo Schneider & Associates LLC, Chicago, said adding absolute return and private real estate options in a DC plan is virtually unheard of.

“In a DC environment, it’s about what vehicle” you use for real estate and absolute return, he said. “Some vendors have those types of products, but they’re not the premier vendors. We’re not seeing interest in private real estate. A lot of our clients have had REITs since 2000, but not private real estate,” Mr. Schneider added.

Stacy Schaus, senior vice president and defined contribution practice leader for Pacific Investment Management Co., Newport Beach, Calif., said that while more plan sponsors are discussing these asset classes, none besides Verizon has added the options.

“There’s tremendous hesitance in the marketplace and it will be a while before we see these strategies taking off,” said Ms. Schaus.

Liquidity issues

Interest is limited in those asset classes because it is challenging to include them in DC plans, said Mr. Schneider.

“The whole essence of private real estate is that it’s private. There are no public appraisals. For REITs, you’re so far removed” from actual property holdings, he said.

Adding absolute return and private real estate options typically pose redemption and liquidity challenges for DC plans. Verizon’s plan, however, has overcome those hurdles, but Mr. Riak declined to provide details.

“The absolute return strategy and the private real estate funds are both daily-valued and are available for daily trading to the participants. There are no restrictions in trading in either fund. They both have cash and more liquid securities attached to them, which allow for daily cash flows,” said Mr. Riak.

The same goes for absolute-return strategies, he said.

“It is unique,” said Mr. Schneider. “It would have to be a very large plan sponsor, like a Verizon, to do this.”

“We’re going to see this evolving,” said Watson Wyatt’s Ms. Spano. “Plan sponsors are struggling right now to get participants to invest in equity for the most part. I’ve had clients ask about private equity, but none of the committees feel comfortable yet.”

It is common for financial services companies to provide alternative investments as part of their internal DC plans. Prudential Financial Inc., Newark, N.J., for example, has a private real estate option managed by the firm in its $5.3 billion 401(k) plan, confirmed spokesman Darrell Oliver. Goldman Sachs Group Inc., New York, reportedly provides an absolute-return option in its internal 401(k) plan.

Four managers

In Verizon’s plan, Prudential manages the real estate option, while three managers provide the absolute-return strategy, said Mr. Riak. He would not identify the managers.

Verizon also added an emerging markets equity strategy, an asset class many large DC plans have added or considered recently. That strategy is managed by Morgan Stanley Investment Management, New York; AllianceBernstein Institutional Investments, New York; and Dimensional Fund Advisors, Santa Monica, Calif., Mr. Riak said.

“We do tend to steer towards institutional commingled and separate accounts. If there is a change with the fund, we could have more control. And it’s a lower-cost option for us,” said Mr. Riak.

Besides increasing the total number of core investment options to 23 from 20, Verizon officials implemented automatic enrollment and increased the company’s match to one dollar for every dollar contributed by employees up to 6% of salary, from a dollar-for-dollar match up to 5% of salary. Verizon also added a Roth 401(k) contribution feature and added target-date asset allocation funds managed by Russell Investment Group, Tacoma, Wash.

Matt Smith, managing director of retirement services at Russell Investment Group, said Verizon’s plan design is very different from most large corporate plans. “It feels like the early ’80s when everything was new,” he said, regarding the new investment options.

More changes possible

Phil Storms, director of human resources for Verizon, said managed account services and investment advice also are being considered for the two 401(k) plans.

“Managed accounts are something we have talked about. It’s not out of the picture and may be something we consider in the future. We’re trying not to overwhelm employees with too much.” Mr. Storms added that Verizon is considering adding investment advice: “We do have a significant population that would be interested.”

The changes do not affect Verizon’s three union plans, said Mr. Riak, adding that subject to union negotiations, those plans, with a combined $8 billion in assets, could undergo design changes. “If the union wanted to pursue changes, it’s something that could happen in the future,” he said.

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 Sunday, April 29, 2007

Motorola follows trend in limiting its pension plan

By Barbara Rose

Chicago Tribune

CHICAGO — There are two kinds of employees working side by side in big companies:

• Those hired in a paternalistic era when pensions were common, who will get retirement payments for life.

• Those who signed on after such rich benefits disappeared, who will retire on what they can save and invest, with a little help in the form of matching contributions from their employers.

In truth, not even the veterans’ pensions are immune from corporate cost-cutting. Often a company’s decision to close its pension to newcomers is a prelude to trimming retirement benefits for other active employees, pension experts said.

A case in point is Motorola.

The cellphone maker based in Schaumburg, Ill., decided two years ago to close its plan to new hires, effective January 2006.

Effective next January, Motorola will change the way it calculates benefits for employees who were in the plan before it closed, resulting in smaller payouts for 24,000 active workers. Retirees are unaffected.

“It’s a variation [on pension freezes] but the theme is still the same: Less is being provided through defined-benefit plans,” said Dallas Salisbury, president and chief executive of Employee Benefit Research Institute, a Washington, D.C.-based nonprofit.

Motorola said its decision, reported last month in a securities filing, comes at a time when many of its competitors have eliminated defined-benefit pensions. Hewlett-Packard is among the most recent examples.

“In our benchmark group, there’s very few that have pensions left,” said Motorola’s director of global rewards, Randy Boldt. “We thought this was a better route so employees still have a pension plan. The alternative was to freeze like everyone else.”

A total freeze means benefits stop accruing, leaving employees with the pension they earned up until the freeze. IBM, Coca-Cola Bottling and Circuit City are among the employers that chose this route in recent years.

Aon and Lockheed Martin, like Motorola, are among those that closed plans to new entrants but allowed benefits to accrue for other employees.

Traditional pension plans cover an increasingly smaller slice of the private work force, though about one-third of Fortune 100 companies still offer them to new employees, according to consultant Watson Wyatt Worldwide.

Less than 18 percent of private-sector workers are covered by defined-benefit pensions, down from 35 percent in 1980, according to the Employee Benefit Research Institute.

Companies freeze plans to avoid the cost and risk of investing pension money. Stricter accounting rules require them to report the market value of their pension funds on their financial statements.

The swings in the funds’ value when the stock market dives or interest rates fall makes their results more volatile.

Pension experts said it is not uncommon after a company freezes a plan to new hires to later reduce benefits for active participants.

“When you see these freezes, it’s quite likely that the long-term strategy is to change benefits for those that are grandfathered,” said Jerry Levy, a Mercer Human Resource Consulting worldwide partner in Chicago.

Motorola averages the five highest years of earnings during an employee’s last 10 years. The new formula will start by averaging the highest in any five of the last 10 years ending in December 2007, then averaging in the remaining years worked.

“We tried to come up with a unique solution that would allow employees to keep accruing benefits and also satisfy the pressure the market puts on us to control costs,” a Motorola spokesman said.

Copyright © 2007 The Seattle Times Company

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