2 Laws May Put New Employees on Faster Track to 401(k)

Companies that sponsor 401(k) retirement plans will soon have one fewer reason--and perhaps excuse--to make new hires wait before letting them participate in these valuable tax-deferred savings plans.

Such waiting periods, many of which are as long as a year, can cost a worker hundreds of thousands of dollars over his or her lifetime.

In fact, by some estimates, a worker who changes jobs frequently could lose as much as half of his or her retirement savings potential over the course of a career if too many employers impose waiting periods.

Starting Jan. 1, though, two new laws will make it easier for companies to eliminate those waiting periods, and without jeopardizing their ability to pass mandatory IRS “discrimination” tests that are designed to make sure highly paid employees don’t benefit too much more from the programs than other employees do.

Although companies cite other reasons for imposing waiting periods, employee benefits experts believe that the new laws will encourage companies to shorten the periods or eliminate them altogether.

“The new rules are going to simplify a lot of the complexities surrounding this issue,” said Tom Burnham, vice president of human resources for Allergan Inc., the Irvine-based eye-care company that eliminated its waiting period more than two years ago.

Adds David Wray, president of the Profit Sharing/401(k) Council of America in Chicago: “This will really encourage companies to complete the move toward immediate eligibility. Immediate eligibility is going to become a common practice, and I think it will happen very fast.”

The only problem: “Not a lot of companies are aware of the new laws,” Wray said.

On their own, companies have been gradually shortening or eliminating waiting periods in recent years, as they’ve seen the 401(k) as a carrot of sorts to attract and retain skilled workers in a tight labor market.

In recent years, TRW, Ingram Micro and Jacobs Engineering Group have all shortened or eliminated waiting periods, citing, in part, competitive reasons.

Notes Alison Rossington, senior benefits assistant with Ingram Micro, a leading personal computer distributor: “It’s just getting harder and harder to get people to leave their companies.”

Be that as it may, 70% of the nation’s 401(k) plan sponsors impose such restrictions. And the majority of them--58%--still make new workers wait a full year before allowing them to make pretax contributions to their company-sponsored retirement plans, according to a 1997 survey by New York-based Buck Consultants, a leading 401(k) consulting firm.

Among this group are some of Southern California’s more prominent employers--such as Walt Disney Co., Hilton Hotels, Home Depot and Times Mirror, parent of the Los Angeles Times.

Many companies that impose waiting periods, especially those with high employee turnover rates, cite the administrative costs and other headaches associated with maintaining accounts for new employees, many of whom quit--or are fired--in their first year.

Notes Kathy Shepard, Hilton’s vice president of corporate communications: “The nature of our biz is such that we have a lot of turnover. For a lot of our employees, this is their first job out of college. So it just makes sense to have a waiting period.”

Besides, new employees, especially young ones and those who don’t earn large salaries, tend not to contribute as much to their plans as do highly paid workers with experience--a critical point, companies have argued.

That’s because all 401(k) plans must submit to a set of annual discrimination tests whose aim is to make sure that highly paid workers aren’t disproportionately benefiting from a company’s 401(k).

One of these tests, known as the ADP (or actual deferral percentage) test, states that within a company, highly paid workers--those who make $80,000 a year or more--can contribute only 2 percentage points more of their salaries than non-highly paid workers contribute of theirs. (The same cap applies to employees who own a 5% or larger stake in the company.)

So, the argument goes, if new hires are allowed in immediately and they don’t contribute--or don’t contribute much--they could affect how much more experienced, highly paid employees can contribute toward their 401(k) retirement accounts.

But the new laws--both part of the Small Business Job Protection Act of 1996--make it easier for companies to pass or get around the ADP tests.

One of the new laws states that companies can “satisfy” the ADP test by structuring their plan in a very specific and generous way, referred to as a “design-based safe harbor.” This can include matching employee contributions dollar for dollar up to the first 3% of contributions, and then 50 cents on the dollar for the next 2 percentage points. Benefits consultants believe that few firms will go for this option, particularly if they already have a traditional “defined-benefit” pension plan as well.

The other law, however, should have a wider effect, benefits consultants say.

It states that companies that allow new hires to participate immediately do not have to count, for the purposes of ADP testing, the participation rates of new hires who make less than $80,000--the group that tends to contribute or participate the least.

This should make it easier for companies, such as Advantica Restaurant Group, that want to eliminate or shorten their waiting periods to go ahead and do so, employee benefits consultants say.

Starting Jan. 1, Spartanburg, S.C.-based Advantica--which employs 20,000 workers in California through its 800 Denny’s, Coco’s, Carrows and El Pollo Loco restaurants--plans to cut its one-year waiting period in half.

From the standpoint of the employee, the benefit of such changes is clear.

Take Helen Ahn.

Last December, the 28-year-old Santa Monica resident took a job as a legal secretary for a law firm in Los Angeles that imposed a one-year waiting period.

She had never been offered a 401(k) before. “So I didn’t care,” said Ahn, who has since left that job to work as an editor and producer for a television production company--where she is allowed to immediately contribute to her plan.

“Now I do.”

Here’s why. Assuming an employee contributes just $4,000 a year to a 401(k) (the IRS limit for 1998 is $10,000) starting at age 22, and works until he or she is 62, that person will have amassed $1.1 million in the account, said Dee Lee, president of Harvard Financial Educators of Harvard, Mass., and coauthor of the book “The Complete Idiot’s Guide to 401(k) Plans.” That’s assuming an 8% average annual return.

But if the worker changes jobs seven times--the national lifetime average--and runs into a one-year wait each time, that person could have just $534,000 by retirement age.

(There may be a way to reduce some of the damage, depending on your circumstances. If you otherwise qualify, you could put up to $2,000 each year you’re forced to wait into a deductible IRA. Nevertheless, you could very well wind up with hundreds of thousands of dollars less at retirement age if forced to go through several such waiting periods.)

Even a single one-year delay, if encountered early on in one’s career, could cost you tens of thousands of dollars by age 65.

That’s what could happen to Debbie Busby. The thirtysomething Manhattan Beach resident began contributing to a 401(k) plan with her first employer, in Texas, immediately after graduating from the University of Texas at Austin. But five years later, Busby moved to Los Angeles, where she took a job with Trident Data Systems, a software company that, at the time, imposed a waiting period. (It was technically a six-month period, Busby said, but she missed an enrollment period and had to sit out a full year.)

“It was annoying,” said Busby. But had she been allowed to invest even $5,000 in her 401(k), she could be $86,000 richer by the time she turns 65, again assuming 8% annualized returns.

From some companies’ standpoint, the advantages of faster participation are less obvious. Those in high-turnover industries, such as retail, cite the added costs associated with having to enroll new hires that might not be with the firm six months down the road. These include not only record keeping but the costs of educating the worker about 401(k) plans.

But Patricia Summers, director of compensation and benefits for Sempra Energy--the San Diego-based parent of Southern California Gas and San Diego Gas & Electric, which in late July eliminated its one-year waiting period for most of its workers--notes that firms with waiting periods have an equally expensive and burdensome task: They have to keep track of when each employee becomes eligible, and find a way to contact that worker and educate him or her one-on-one about 401(k) options, she said.

This can be especially costly for companies whose employees are scattered in dozens of locations throughout the world, said William Gebhardt, vice president of human resources for Pasadena-based Jacobs Engineering.

For instance, before Jacobs got rid of its waiting period in 1995, Gebhardt recalled the difficulty of finding field services workers, such as welders and pipe fitters who are often working on projects for clients, when they became eligible to contribute.

Now that Jacobs allows immediate participation, the company can educate its new hires at the same time it discusses other benefits at orientation.

Since Allergan did away with its waiting period, the percentage of employees participating in its plans has shot up from 64% to 73%.

Allergan’s Burnham notes that the ability to sit down and educate new hires at orientation--when their minds are on benefits--is critical in convincing workers, especially those who aren’t highly paid and aren’t as familiar with the importance of 401(k), to take advantage of the plans.

Not only has this benefited those employees, it has helped Allergan recruit middle-level managers.

How? Because non-highly compensated Allergan employees contribute a greater percentage of their paychecks to their plans, this has increased the percentage that highly compensated employees can contribute to their plans, Burnham said. Some can now sock away as much as 12% of their salaries.

“I just don’t understand why there’s a need for a waiting period,” he said.

401(k) Issues The Times plans more stories about employer retirement plans. If you have suggestions for topics, please e-mail Times staff writer Paul J. Lim at paul.lim@latimes.com, or write to him in care of the Los Angeles Times, Business Editorial, Times Mirror Square, Los Angeles, CA 90053.

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Waiting Game

Of the U.S. companies that have waiting periods before new hires can join 401(k) retirement plans, the majority --58%--require a year:

One month: 10%

Two months: 2&

Three months: 13%

Six months: 17%

One year: 58%

Source: Buck Consultants

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Who Has to Wait

Many of Southern California’s more prominent employers require waiting periods before new hires can join their 401(k) programs. Others let new hires participate immediately. A sampling:

* Employers with waiting periods

*--*

Company Industry Waiting period Beckman Coulter Medical Supply 3 mo Ingram Micro Computers 3 mo TRW Engineering 3 mo Advantics Restaurants 6 mo* Kmart Retail 6 mo Disney Entertainment 1 yr Hilton Hotels Lodging 1 yr Home Depot Retail 1 yr Pacific Sunwear Apparel 1 yr Times Mirror Media 1 yr

*--*

* Employers without waiting periods

*--*

Company Industry Allergan Eye care Boeing Aerospace Fluor Engineering/construction Jacobs Engineering Engineering Kaiser Permanente Health care Litton Defense Mattel Toys Northrop Grumman Defense Sempra Energy Energy Unocal Energy

*--*

* Effective Jan. 1