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PLAN SPONSOR OF THE YEAR

Corporate 401(k) >$250MM - $1B

Owens-Illinois, Inc.

Etta Strong

TOTAL PLAN ASSETS/PARTICIPANTS: $311.3 million/2,189

PARTICIPATION RATE: 97%

AVERAGE DEFERRAL RATE: 9.4%

DEFAULT DEFERRAL RATE: 4%

Owens-Illinois, Inc. (O-I), the world’s largest glass-container maker, decided to freeze its closed U.S. defined benefit (DB) plan for salaried employees as of last year, and it was not an easy choice.
 
“It goes back to a risk-mitigation strategy, to managing a major liability for the company,” says Paul Jarrell, senior vice president and chief administrative officer (CAO) at the company, which has headquarters in Perrysburg, Ohio. “I’m a defined benefit plan fan, so this decision was very difficult. But it’s unfortunate that the regulations are what they are and that they create these large financial impacts flowing through to a company’s balance sheet, which leads to shareholders needing greater stability in the managing of those assets.”
 
Freezing the plan, as of January 1, 2016, limited the company’s funding downside exposure. The $625 million U.S. salaried plan is 73% funded on a GAAP (generally accepted accounting principles) basis. O-I, which has 80 plants in 23 countries, continues to sponsor an active cash-balance plan for hourly U.S. employees, and a few defined benefit plans at some locations outside the U.S.
 
At the same time, O-I—which works with John Hancock Retirement Plan Services as the 401(k) plan’s recordkeeper—decided to enhance that plan’s features. The employer increased its base contribution to employees from 2% to 3%, boosted the match from 50% on 8% to 50% on 10%, and started including bonuses in the eligible-compensation definition for the base contribution and match. The plan also bumped up its automatic design features: The initial deferral rate rose from 3% to 4%, the automatic escalation ceiling increased from 10% to 20%, and the plan launched an annual sweep to re-enroll nonparticipating employees and employees saving less than 4%. The $311.3 plan has 2,189 participants and a 97% participation rate, with 9.4% average deferrals.
 
“We said, ‘Look, if we are going to do this, we have to make the DC [defined contribution] plan a really attractive and competitive plan, and to make sure our employees understand the value of it,’” Jarrell says. “We knew this obviously would be an emotional event for those employees who were in the defined benefit plan and that we needed a DC plan that is best in class.”
 
One Enterprise, One Team, One Plan
Owens-Illinois officials anticipated that some employees likely would feel happy about the retirement-plan changes, while others would not. “We have two ‘bubbles’ of employee populations, [one] at each end of the age/service spectrum,” says Etta Strong, director, North America compensation and benefits. “We have a very large population of employees who have long years of service and who were in the defined benefit plan. They were used to O-I being a very paternalistic company, and we were concerned about how they would react. We also have a very large group who are newer and just have the DC plan, so we thought they would react positively.”
 
In deciding to make the changes, and considering how to explain them to employees, O-I had the advantage of already having chosen guiding principles for its retirement plans, Strong says. These include four cornerstones: offer market-competitive retirement plans; assist employees and their families in understanding their retirement benefits; manage the risk of retirement plans having a detrimental financial impact on the company; and aggressively manage the plans’ administrative costs.
 
The company decided that employees of all tenures should have the same employer contribution rate in the new 401(k) plan design, rather than giving longer-tenured workers from the pension plan a higher contribution rate. “It gets to, as an employer, do you want employees in different pools treated in different ways?” Jarrell says. “Our message to employees is, ‘This is one enterprise, one team, one plan.’ I want people to feel like they are all a part of the same entity.”
 
To get a better sense of how to change the employer’s contribution, O-I worked with management-consulting firm Hay Group, which put together data on where its 401(k) stood compared with peer plans, says Chris Williams, O-I vice president, enterprise remuneration. Hay Group does a competitive remuneration study for the company about every two years, he says.
 
“We had some room for improvement with the 401(k),” Williams says. “We were looking at a base contribution, plus a maximum match, of 6%. Our assessment was that the competitive position we wanted to be at was an 8% contribution.” So to add 2% total to the employer contribution, the plan increased the base contribution 1% and the match 1%.
 
“Using a 70% income-replacement ratio, projections show that when factoring in Social Security, 78.5% of employees are now on track to be at that level or higher,” Williams says. “The new employer contribution, the auto-enroll features and the sweep were all designed to help employees achieve their retirement goals.”
 
Preparing Employees for Change

O-I told employees about the defined benefit plan change more than a year in advance. “As we thought about how we wanted to educate our employees on this change, we knew it was very important that we didn’t tell people how to feel about it,” Strong says. “We wanted to give them the information to educate them and to allow them to engage in their retirement planning.”
 
The company’s multi-channel approach included holding roughly 45- to 60-minute on-site group meetings, during work hours. Asked how O-I explained the reason for the pension plan change at those meetings, Strong describes the message as, “To ensure that the pension benefit you have accrued remains protected and available to you, we need to stop increasing the liability that the company accrues. And we need to provide you the retirement benefit differently.”
 
The company also explained that it wanted to offer the same level of benefit to all employees, regardless of their tenure, so all would accrue retirement benefits the same way. At the meetings, the company also explained the key enhancements to the DC plan and suggested actionable steps for getting on the right track with 401(k) savings.
 
During the same time frame as the group meetings, the plan’s adviser, PearlStreet Investment Management, offered one-on-one meetings for employees who wanted a personalized discussion. The one-on-ones usually lasted about 30 minutes, and they included a comprehensive retirement-income projection for the employee, as well as advice to help him bridge any savings gap.
 
PearlStreet continues to come to I-O’s main campus monthly for those individual meetings. And, at least annually, it does on-site meetings at O-I’s plant locations. The employer has tracked follow-up actions by the workers who have attended these sessions. “[They] have a higher average deferral rate. They also have a more-diversified portfolio,” Strong says. “And they take fewer plan loans.” —Judy Ward

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