by: Jeannie Mandelker
from:  CFO
April, 1999

(The following is an excerpt, please contact us if you would like a copy of the complete article.)

A Personal Rate of Return
Whether employees are brand-new participants or veteran enrollees, their retirement plans require three critical pieces of information:  the regular amount a person is able to save, the time horizon for accumulating the savings, and a person's expected rate of return.  The first two questions are easy to answer, but few participants have known precisely what returns they, as individuals, have earned on their 401(k) plan.  Until now.

Last year, Fidelity Investments, in Boston, and MassMutual, in Springfield, Massachusetts, became two of the first providers to publish a personal rate of return on their statements.  The single figure aggregates the performance of all funds held in the participant's 401(k) account, and measures the impact of all contributions and withdrawals that occur during the quarter.

"That single number is powerful," says Kathryn Hopkins, executive vice president of Fidelity Investment Retirement Services Co.  She likens the number to a report card on the assets held and the individual's own activity.  "It helps people understand the effect of loans and fund performance on the account."

"A financial statement is a progress report.  Am I headed toward my goal or not?"  explains Vern Meyer, vice president of marketing at MassMutual.   Meyer calls the introduction of an individual return "part of a broader trend to put more information in the hands of the participant, because it is the participant who drives the 401(k) plans."

And sharp 401(k) plan contributors want the information.  Employees at New England Circuit Sales Inc. (NECX), which operates a centralized marketplace for buying and selling computer parts, in Peabody, Massachusetts, clamored loudly for an individual rate of return.  "At a meeting, they told me, 'Those investment results you're showing aren't correct.  We did our own calculations, and they aren't anything like that.'" recalls Roxanne Fleszar, president of Financial Resources Management Corp., NECX's 401(k) consultant, also in Peabody.

The employees wanted the information, but struggled with the calculations, so Fleszar approached the plan's recordkeeper, Independent Pension Consultants, in Chaska , Minnesota, and asked if it could calculate time-weighted performance returns.

The cost to NECX was "marginal," according to Larry Marshall, the company's executive vice president and chief operating officer.  "I don't know if it is your responsibility to your employees [to provide individual rates of return] as much as it is a responsibility to run a good business, which means having more productive employees and meeting their needs whenever you can."

Up until the first quarter of 1999, when MassMutual tacked on the individual return on quarterly statements, Lee Bachman, vice president of finance and treasurer of Bachman's Inc., in Minneapolis, calculated his own individual return.  Bachman's is a $75 million, family-owned florist and gift and garden-supply retailer with an employee base of 1,000.

Family member Bachman crunched numbers to determine his return to confirm that his account's actual performance is close to the performance of the funds in the account.   Now employees will be assured the same thing without the work.  "They can determine if they really are getting what they think they are getting from their investments," he says.