EMPLOYEE
            BENEFITS

Winston Shepard, director of operations for Metro Video Productions' Richmond office, learned the importance of retirement planning the hard way.

He is now director of operations for the Richmond office of Metro Video Productions, and he has become something of an investment guru for fellow workers. He was responsible for researching and negotiating with financial institutions to set up a multi-option, employee-driven retirement plan for the 35-employee company, which is headquartered in Williamsburg.

“If that first meeting 12 years ago had been good, then ... oh, the money I could have had in my retirement account by now,” Shepherd laments. “It pains me to think of it, but the woman who tried to explain it to us really turned us off. She used an $80,000 salary as an example to illustrate how our money could grow. We were a bunch of videographers and production assistants, and we could not identify with that.”

Shepherd vowed not to make the same mistake. He researched options for employee-financed plans, and while working at an Orlando video-production company, helped the firm set up a 401(k) for its employees. By the time he moved to Metro Video, he not only was a convert but had become a seasoned promoter. “Like a lot of owners of small- to medium-sized businesses, they [Metro Video] thought they didn’t qualify for a 401(k). Many people still think it only applies when there are more than 50 employees,” Shepherd says. Employers also worry about high administrative costs and mounds of paperwork.

Once Shepherd explained that most of today’s 401(k) packages include both investment-fund management and administration, Metro Video’s owners were receptive to the idea. They decided to use the 401(k) to replace their profit-sharing plan, which offered employees no guarantee of employer contributions and no control over what happened to their money.

Shepherd asked five financial institutions for bids, and the company chose a plan offered jointly by Signet Bank and Kemper Financial Services. The bank’s small-business division coordinates the account and provides education, while Kemper furnishes investment funds, record keeping and safeguards to ensure compliance with tax regulations.

Since July 1995, qualified Metro Video employees have been investing 2 percent to 15 percent of their salaries, up to $9,500 annually, in one of six funds that range from low-risk money market funds to more volatile international stock funds.

“We realized we could not fund a pension plan that will provide the half million to $1 million they say will be needed [for each retiree] to supplement Social Security, ... but we could provide the tools,” says Metro Video controller Ray Walsh. And the workers responded. “We already have more than 90 percent participation, and a lot of them have maxed out their contributions.”

Most banks, insurance companies, investment-fund “families” and consultants offer similar selections. The differences among providers are subtle, and a company’s best choice may depend on what it needs most, says Chip Rosenthal, managing consultant with New York-based Foster Higgins.

Consultants know all the regulations a retirement plan must follow, Rosenthal says, while banks and insurers are strong on day-to-day record keeping. Fund families offer resources on the investment-management side.

Shepherd likes Signet mainly for its strength in doing what his previous employer failed to do – communicating the essence of the plan to the people who should be using it. “I told all the bidders they would be responsible for helping me sell this idea to the troops,” he recalls, “and Signet really impressed me with its response.”

Efforts to launch employee-directed retirement plans 15 years ago often yielded lackluster participation, and many experts say it was because of introductions like the one Shepherd experienced. Companies and fund providers relied on quick meetings and stacks of brochures and prospectuses to get their message across. “And we all know how many people read prospectuses,” Walsh says.

Now the plans are more popular. During the 20 years since the introduction of defined-contribution plans, the number of such plans has nearly quadrupled to 380,000 in 1995, according to Access Research Inc. Yet recent studies indicate that the average worker still is not saving enough money to finance a post-employment golf habit and a condo in Sun City.

A survey of 540 companies, conducted by Connecticut-based Rogers Casey, found that most plans have more than 75 percent participation. But the majority of managers surveyed say most of those participants are not saving enough. Many employees also invest too conservatively.

The good news is that education programs seem to work. Among 743 companies surveyed last year by Foster Higgins: 79 percent say education programs have influenced asset allocations, 64 percent say they have encouraged higher contributions, and 60 percent say they have increased participation. “There is a recognition on the part of baby boomers of how much they really need to save for retirement,” Rosenthal says.

Government officials encourage 401(k) sponsors to keep employees informed, but until recently the feds told employers not to offer investment advice. This past June, however, the Department of Labor issued a bulletin opening new options for companies that want more freedom to keep employees informed.

There still is debate over an employer’s liability and fiduciary responsibility, and the issue ultimately may be decided in the courts. More than a third of U.S. states – including Virginia – have laws requiring sponsors to follow “prudent investor” guidelines, avoid tax penalties and keep administrative costs down.

Amy Reynolds, a retirement consultant with William D. Mercer Inc.’s Richmond office, says an employer’s choice of plans reveals its sense of responsibility toward its workers. “Some feel paternalistic and want – above all else – to take care of their employees,” Reynolds says. “Some are more concerned with saving money. And often, there is a tug of war within an organization.”

Roanoke Gas Co., which provides natural gas and bottled propane to residents throughout Southwest Virginia, offers employees a conventional defined-benefits retirement plan and a 401(k) with eight investment options. The defined-benefit plan, which offers guaranteed retirement income, has been around almost since the company’s inception. The 401(k) evolved from an old profit-sharing plan. In 1982, the company converted the profit-sharing plan to a thrift plan that allowed employees to invest up to 6 percent of their salaries with a company match plus another 10 percent on their own. Last year, based on advice from Mercer, the utility changed that plan to a 401(k).

“Our employees were so comfortable with the thrift and already used to investing their own money,” says Vice President Ray Baumgardner. “We felt it was important to give them a chance to invest at their own limits of risk ... and they made the change easily. Participation is at 93 percent.” Roanoke Gas’ 150 employees are a diverse group, including executives, clerical workers, operations personnel, technicians and service reps. But Baumgardner believes they are more financially sophisticated than most work forces because of their experience with the thrift plan.

Mercer helped Roanoke Gas prepare a request for proposals from 401(k) pro-viders, and the utility selected T. Rowe Price to provide the funds in the plan.

Employer and employee expectations regarding 401(k) plans are much higher than they were 10 years ago, according to Reynolds. She believes 401(k) providers and retirement consultants must match all the bells and whistles offered by competitors, and also be prepared to help their customers anticipate and deal with changes in employees’ interests and perceptions, political pressures and the realities of market volatility.

The Small Business Job Protection Act of 1996 appears to be a retirement booster shot for sole proprietorships and other small companies. The law creates two new retirement mechanisms called the “simple IRA” and the “simple 401(k).”

Billed as replacements for the SEP-IRA and SARSEP – retirement plans typically used by smaller companies – these new “simple” plans are true to their names, says Harold Brown Jr., a partner in The Jacobs Financial Group of Chesterfield County. Both require sponsoring companies to contribute something to the retirement pot, but they don’t demand any minimum level of employee participation, nor do they require employers to conduct complex tests. “This is really going to open up pension plans to a lot of smaller businesses,” Brown says. The new law also enables many companies with fewer than 100 employees to manage simple 401(k) plans themselves and save the administrative costs of a full-fledged 401(k).

Regardless of the type of plan, many small companies rely on their financial advisors to help them untangle the web of rules and regulations. One such firm is Target Communications Inc., which publishes Richmond magazine with less than a dozen full-time employees.

Target recently hired Jacobs Financial to set up its first-ever retirement program, a SARSEP plan that the company christened on Jan. 1 with four eligible employees. The plan allows employees to invest as much as 15 percent of their before-tax income – up to $9,500 – in any of nine funds provided by The Equitable Life Insurance Co.

“We liked this plan because nothing was cut in stone,” says Elise Malkman, the company’s controller. “It gives our employees a lot of flexibility, and it gives us flexibility. A [conventional] 401(k) was too expensive for us. ... We chose Jacobs because the level of service it offered was unbelievable.”

Service is clearly the most important distinguishing characteristic among fund providers. Metro Video’s Shepherd probably would have embraced Brown’s approach had it been available in Florida 12 years ago. “Pensions are just not an easy subject to understand,” Brown says. “That’s why we try to develop relationships with everyone we work with, not just the boss.”