Small to mid-sized businesses are often stretched to the limit in managing their human resource responsibilities-with one of the efforts being the administration of group 401(k) retirement and investment programs.
When employers make amendments and other modifications to a group 401(k) plan, the effort often consists of manually logging changes-such as modifying terms of employee eligibility for plan participation. Perhaps an employer decides to vest employees in the group plan once they've attained 1,000 hours of service-rather than a higher or lower threshold they had originally established.
Making these plan amendments is often the simple part. The heavy lifting comes when HR staff must perform the manual paperwork-printing, faxing and mailing-in executing the changes. To compound matters, an employer must make plan modifications in conjunction with the financial services provider that offers the program.
In mid-2002, Des Moines, Iowa-based The Principal Financial Group made an investment that appears to be as good, or even better, than many 401(k) plans. To benefit the company's network of 25,000 plan sponsors and its team of 90 401(k) account servicing representatives, The Principal is enabling clients with so-called prototype-or standardized-401(k) plans to access amended documents and restatements online around the clock, and review and approve amended documents by e-signature.
The benefits are manifold: ease and efficiency of doing business, faster turnaround time on amendments and restatements through automation of manual processing steps, easy access to updated documents, increased security and a better authentication process. Clients of The Principal also have the ability to access an updated directions guidebook for fast answers to questions, and all online documents are available as print-on-demand.
Developing the program entirely in- house, The Principal-which has $134.8 billion in assets under management serving 14.8 million customers worldwide-has enlisted about 20% to 25% of its plan sponsors to participate in e-signature plan administration.
In the coming year, executives hope the adoption rate will rise further as more plan sponsors become more comfortable with the deployment of electronic signatures, says Jack Stewart, who heads retirement & investor services consulting for The Principal.
For The Principal's 25,000 prototype 401 (k) plans, it generates about 20,000 amendments or restatements each year. Some employers declare no changes to plans within the course of a year, while other plan sponsors make multiple changes. Along with its prototype 401(k) plans, The Principal also has a team of assigned consultants that help clients design customized 401(k) plans. These accounts are presently not included in the e-signature initiative.
For executives at The Principal, the decision to invest in this initiative was simple. "We realized that most of our plan sponsors are small to mid-sized businesses that have very small HR departments," explains Stewart. "This places a great deal of stress on them to manually perform plan amendments and then fax or mail them to us.
"By having access to e-signature technology, they can sign the documents and instantaneously transmit them back," he says. "One big reason for doing this was we wanted to spur Internet usage by our plan sponsors. Converting prototype SPDs (summary of plan descriptions) to an electronic format was an impetus for doing that."
Moving 401(k) plans to the Internet was a litmus test for The Principal to determine the adoption rate in managing accounts electronically. While some employers have reservations about electronic administration due to security and privacy issues, others recognize the redeeming values immediately.
Manually processing 401(k) plan modifications is typically a three- to four-step process, Stewart says. The multiple steps-and the margin for error-can undermine the process. "Often, pages would be missing when this is done manually," Stewart adds.
But now, with approximately 98% of prototype 401(k) clients having access to an electronic version of their 401(k) SPDs, e-delivery of documents from clients automatically flows into The Principal's record-keeping database in real time, says Stewart.
When a plan sponsor or one of The Principal's account-servicing reps needs to access 401(k) account data, they launch Adobe Acrobat PDF files, and the account information is retrieved from one of The Principal's back-end underwriting systems using XML, explains Stewart.
"It's the most current version of the plan, and there's no coding changes to perform, which was a departure from the past when coding changes on a document could take 30 to 40 minutes."
With the tools in place to view SPDs in 2002, The Principal then proceeded with a plan to enable e-signatures, which it launched May 1.
In what's considered the sincerest form of flattery, The Principal--which believes it's the only 401(k) provider that has such an e-signature program in place--received inquiries from some of its competitors who were intrigued by the provider's ability to implement such a program, says Stewart.
The fact that The Principal accomplished the task entirely in-house-with no third-party support-only added to the intrigue.
"We did not have to partner with a third-party vendor to introduce this," says Jan Purdum, senior consultant for The Principal. "We developed the program entirely in-house, with the R&D taking roughly a year. We have a very strong IT division that enabled us to bring this to our clientele."
Changes in the law
What also helped the provider's cause was the passage of the federal law (The Electronic Signatures in Global and National Commerce Act) that made e-signatures uniform nationally rather than having to adhere to state-by-state laws, Stewart says.
"With the changes in the laws, these enhancements enable us to receive more than 20,000 signatures electronically and automatically update records, providing immediate turnaround, complete accuracy and easy access to plan documents for clients," adds Stewart.
The Principal received a boost from senior management to move forward with the program, in large part because its IT reputation precedes itself.
"We had to build a business case for this to work. It was fairly easy to sell this to senior management because of the success stories we've had in the past regarding technology-related initiatives," notes Stewart. "We conducted a thorough cost-benefit analysis about how this would pay off for us internally and for our clients."
In the nearly four years since Congress passed The Electronic Signatures in Global and National Commerce Act-essentially making electronic signatures equivalent to wet-ink signatures-The Principal is among a small legion of financial services providers who have made it a priority to do away with wet-ink signatures in favor of electronic ones.
An estimated 5% of insurers are using e-signatures on a regular basis, according to a December 2002 report, titled "E-Signatures & U.S. Insurance," produced by Celent Communications Inc., a Boston-based research and advisory firm.
Unfulfilled adoption of e-signatures is owed in part to a lack of mature technologies. However, insurers are also holding off on e-signatures because they're uncertain about various compliance issues.
When insurers have examined an e-signature implementation strategy, there are various technology deployments from which to choose, including clickwrap, digital signature, digital certificate, digital point-of-sale signature and public key infrastructure (PKI).
Clickwrap is the method deployed by The Principal. Under clickwrap, which is appropriate for lower risk transactions, a plan sponsor clicks on a set of checkboxes indicating their intent to bind an amendment or rider to a contract. They then type their name twice and select an "I agree" button to electronically sign the application.
When the plan sponsor hits "I agree," the application is "locked down" with a date and time stamp and an encryption key to prevent any information from being altered without being detected.
The locked-down, encrypted process enables carriers to prove that the application a person signs and submits online is the same one the company uses to underwrite the policy.
When plan sponsors enroll in The Principal's program, they begin by logging in to the provider's Plan Sponsor Service Center, a Web site that enables them to make restatements and amendments to their 401(k) plan policies.
"If a plan sponsor wants to amend eligibility to 1,000 hours a year (to make employees eligible to participate), we can produce this amendment electronically and transmit it from the Service Center to the plan sponsor's Web site," says Stewart. "We often alert them via e-mail that there are unsigned documents to review. They can then either print the signature page and mail or fax it back to us, or they can elect to use the e-signature function," he says.
Plan sponsors are provided a PIN number that ensures security. By signing off, they select a series of boxes within the clickwrap that verifies their identity. Once they check these boxes, they transmit it back to The Principal's system and it's updated in real time.
Stewart says that individual plan members who own 401(k) plans are not provided the authority to electronically sign documents-only plan sponsors. However, individuals can still obtain access to account information electronically by activating a customized Web site designed for this purpose.
Plans to customize
Ultimately, The Principal wants to expand the program to include customized 401(k) plans, perhaps sometime this year. "Currently, we only have prototype plans eligible to participate," notes Stewart.
"We also have about 2,000 to 3,000 customized 401(k) plans in our network, which are more complex and tailor-made plans that don't conform to all IRS requirements. Allocation formulas are different with these accounts than with prototype accounts," he says.
For now, The Principal is enjoying the fruits of its labors as it has been able to wring about $2.2 million out of its printing and mailing costs, to say nothing of the customer service advantages the program has yielded.
"In the end, the more we can do electronically, the more we can control operational costs," says Stewart. "Not only with mailing and printing, but we'll be able to hold down staff growth when this administration can be done electronically."
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