Ken Eason, 57, recently made what he describes as "one of the major financial decisions" of his life. The accountant's employer, Devon Energy (DVN), had offered Eason and about 3,400 co-workers an unusual choice: Stick with the company's traditional pension and 401(k) retirement plans or stop the clock on both and switch into a new "super 401(k)."
The new plan would provide workers with employer contributions so generous, a significant number could reasonably expect to do better than they would in the traditional defined-benefit pension plan. In return, employees would have to cede to the Oklahoma City company much of the control over their investment decisions. Eason and other Devon employees had until the end of the fall benefits enrollment season to make up their minds. Once the Nov. 15 deadline passed, their decisions were irrevocable. "It's a very tough choice," said Kim Wilkerson, 46, a manager who oversees alliances with other oil and gas companies.
Devon's new super 401(k) is at the cutting edge of a trend that's reshaping retirement benefits. Traditionally, employees have wielded decision-making authority over their own 401(k)s, by electing whether and how to invest. But as a growing number of employers have scaled back or eliminated defined-benefit pension plans, government and corporate policymakers have realized 401(k) participants haven't done a very good job of managing their savings. Emboldened by recent legal and regulatory changes that shield employers from lawsuits, more are starting to make changes to 401(k) plans with the goal of taking the decision-making out of employees' hands. "It's the wave of the future," said Jack L. VanDerhei, research director of the Fellows Program at the nonprofit Employee Benefit Research Institute.
As a result, these new 401(k)s are starting to look more like a traditional pension plan, in which the company makes decisions about funding and investments. The big difference, of course, is that if the investments don't work out, it's the employee's problem, not the company's. Some 34% of employers are automatically enrolling workers in their 401(k) plans. Many are funneling these contributions into diversified investment programs, most of which automatically become more conservative as retirement nears. About 35% are also prodding employees to agree up front to divert a larger percentage of their salaries each year into the 401(k). The goal is to get everyone to kick in enough to qualify for the maximum in matching funds from the company. Employees can opt out of any of these plan features, but few do.
Not many companies are going as far as Devon. Come Jan. 1 the company will set up accounts for employees who switched over from the traditional pension plan. It will also start automatically enrolling new employees--who are ineligible for the old pension plan--in the new 401(k) at a 3% contribution level.
Rather than rely on employees to take the initiative to save, Devon plans to save for them--by making annual contributions to these accounts in line with what it would have spent to provide a traditional pension benefit. Depending on an employee's tenure, the company will put 8% to 16% of annual compensation into the 401(k)--regardless of whether the employee kicks in a dime. For those who put money into the plan, the company will also match it dollar for dollar up to 6% of salary.
Add it all up, and Devon workers who divert 6% of their pay into the super 401(k) could receive as much as 22% per year from the company. While many companies that freeze pensions increase their 401(k) contributions, Devon "is one of the few coming close" to what's required to compensate employees for the loss of a pension, said EBRI's VanDerhei.
Why is Devon being so generous? Devon does not expect to save money by switching plans, but like many companies it's looking to decrease the pension liabilities on its books. But it has another agenda: Amid boom times for the oil and gas industry, the company is facing a labor shortage that is expected to become more acute over the next decade as 57% of its U.S.