May 9, 2013
How Good Is Your 401(k)?
When Sanofi froze its defined benefit pension plan last year, the top brass wanted to make sure its 401(k) was seen as a worthy replacement by the company’s 24,000 U.S. employees and retirees.
Sanofi has succeeded, judging by Plan Sponsor magazine’s designation of the U.S. division of the French pharmaceutical giant as 2013 “Plan Sponsor of the Year.”
In corporate America, 401(k) plans are now the norm: in 2012, only 11 of Fortune magazine’s 100 largest companies still offered a traditional defined benefit pension, according to the consulting firm Towers Watson. But Sanofi U.S. had strong motivation for designing a 401(k) that is generous compared with typical 401(k)s.
The company has “highly technical, highly specialized, highly skilled [employees] that we have to recruit for and retain,” said Richard Johnson, senior director of benefits. “We wanted to ensure our employees had adequate retirement income.”
Squared Away recently interviewed Sanofi executives about their plan’s details, shown below, which readers can compare with 401(k) plans in their own workplaces. We hope you’ll post a comment on Facebook and let us know how, or whether, yours stacks up.
Here how Sanofi compares with other 401(k)s:
To ensure that employees participate in the 401(k), the company automatically enrolls everyone into its plan. Although they can opt back out, most stay. The company also made it more difficult for employees to use their 401(k)s as emergency funds by limiting the number and frequency of loans they can take out of their savings.
“Their 401k is very generous, very robust – a fabulous plan – and they see it as part of their compensation package,” said Francisco Negron, head of T. Rowe Price’s retirement plan services for clients, which include Sanofi.
The plan redesign last year followed 2010 improvements on the investment side, including reducing the number of mutual funds that employees can pick for their investments. This change was intended to minimize confusion over what to invest in. Low investment fees – 0.33 percent of assets – also mean employees can keep more of their savings for retirement.
“With the size of our plan, we have the ability to negotiate” fees, said Ed Grass, treasurer.
As good as Sanofi’s plan design is, however, a 401(k) remains a complex animal. When someone retires, the challenge changes from building up and investing one’s savings to figuring how to spend it. In contrast to defined benefit pensions that issue a fixed pension check every month, 401(k)s pose a host of confounding questions: How fast can I spend my savings? Should I save it all for a nursing home? Can I afford to travel? What about taxes? Inflation? Are the investments I picked still okay?
Sanofi retirees have various options: withdraw all their savings at once, periodically withdraw funds at their discretion, or set up regular cash withdrawals each month, quarter, or year. Sanofi offers employees some help, in the form of an online calculator to guide drawdown strategies and an annual webinar.
But retirees at any company with a 401(k) remain at risk when making complex decisions about spending their precious savings. A few big mistakes over the next 10, 20, or 30 years, and one of two things can happen: the retiree runs out of money or is over cautious and doesn’t spend enough, forgoing opportunities to enjoy retirement.
Readers: what type of arrangement does your employer have and how does it compare with Sanofi’s? If you’re retired, how are you managing your accumulated savings?