The Tech Giant Way to Do 401(k)

Auto-enroll? Nope. Custom TDFs? Wrong again. To build one of the best defined contribution plans in America, Microsoft tossed conventional wisdom in favor of hard data.

Fred Thiele MicrosoftFred Thiele, Senior Director, Global Benefits, MicrosoftNo sector of the US economy competes as fiercely for talent as the technology industry, where benefits are all-important carrots, not afterthoughts. Fred Thiele, Microsoft’s senior director for global benefits, gives an inside look at crafting a retirement plan befitting one of America’s most successful corporations.  

CIO: Microsoft joined several other tech giants (Netflix, Adobe) this summer in offering extended parental leave—a move that caused quite a splash in positive press. But you also took the bold step of uncapping 401(k) contribution matches. Why invest in this potentially less sexy—although not to CIO readers—benefit enhancement? It must be a pricy one.

Thiele: First of all, I appreciate the congratulations on the whole package. We went at this through a lens of not being piecemeal, but rather, how can we upgrade the entire benefits package? To do that, we embarked down a number of avenues to find out what offered biggest impact for this new investment. 

“Without data, you’re just another person with an opinion.”When we do anything at Microsoft—and this is probably true of any tech company or possibly any Fortune 500 company—we are incredibly data-driven in our decision science. On the subjective side, we did focus groups and also simply interviewed employees about their priorities. And then we did scientific things, including wonkish conjoint analyses where we pose a number of options in a survey, and have employees pick A vs. B, C vs. A, and so on. With that technique, we could derive high-value benefit preferences.

The question we wanted to answer, in the simplest terms: What can we do that matters to employees?

CIO: Is this level of data analysis happening at other companies? I’ve never heard a plan sponsor describe designing a 401(k) or benefits system this way. 

Thiele: It’s probably not common. I can’t speak for other companies, but many plan sponsors face realities of greater budgeting constraints or smaller market position. No doubt there are other companies out there with this high standard, but it would be great if more did it. Well, maybe not… The fact that we do perhaps gives us a competitive advantage.

I remember hearing a quote a long time ago: “Without data, you’re just another person with an opinion.” And it’s very, very true. I couldn’t get these packages through my internal process here unless I brought a full case including objective data. 

CIO: What’s the daily experience of working as a plan sponsor for a super successful technology company? The industry is obviously thriving, but there have been reports of, shall I say, ‘challenging’ corporate cultures.

Thiele: I love it; I really love it. I’ve been in tech my whole career, although I’m a tax lawyer by trade. Working at Microsoft is fast paced; it’s energetic; it’s innovative. You deal with the smartest people around. They constantly challenge you—and not just management and leadership, but also the employees.

People might think employees disregard benefits, that I’d hear from staff, “I don’t really care about that because I’m 25 and invincible.” But that’s really not what I’ve encountered. And so it would be hard for me to move from technology, even to a company with, let’s say, a giant DB [defined benefit] plan. And, as you know, DB plans are fun in their own right.

“I think you aren’t going to see us go into the custom space just to be different. What our employees aren’t paying in fees goes directly in their pockets.” CIO: I am probably one of few 27-year-olds who absolutely agrees that pensions are fun in their own right. But like Microsoft, I’ll likely never have one. Your defined contribution [DC] plan ranks as one of the best in the country, however. It earns especially high marks on fees and company generosity—and that was before you uncapped matching. How much do efficiencies of scale contribute to this? At roughly $13 billion and 85,000 members, you surely have some negotiating power. How much is simply corporate philosophy? 

Thiele: There’s no doubt that scale plays a role. It gives us a lot of heft in approaching PIMCO, Vanguard, Fidelity, or another provider. We’re driving a lot of business to them. We only have 20 core funds plus company stock—we’re not one of those places with a menu of 50 or 60. When we put a firm in our core offering, they know that’s a pretty high place to be, and so the scale helps us immensely.

But our corporate philosophy is certainly aligned to the overall savings picture. There are two ways for our employees to make out to the point where they can have a nice retirement. One, of course, is saving more—both by employees and through our additions. We’ve added to that aspect with our increased match.

The second way is by members paying less for high-quality investments. We’re as focused on the cost side of the balance sheet as the savings side of the balance sheet. And we’re heavily focused on the cost side. In our meetings, we talk very much about the expense ratio—just one of a pantheon of indicators for monitoring the investments. And we’re quite proud our average expense ratio right now is 25 basis points. Our target date funds are 9 basis points.

CIO: Did you go the custom route with the target-date funds? For corporations of Microsoft’s size, I know many choose to DIY.

Thiele: No, and I think you aren’t going to see us go into the custom space just to be different. Some people do make their own target-date funds with all these nontraditional features, but all of a sudden the expense ratio vaults up to 50 or 60 or 70 basis points. We’re content using institutional products that are high quality, top of their Morningstar class, and take care of themselves. We can find what want in the open market, and combine that with a very focused negotiation on fees. We know that what our employees aren’t paying in fees goes directly in their pockets—or, rather, 401(k) accounts.

CIO: I’ve read a host of research showing automatic enrollment is among the most powerful tools for DC retirement saving. Is Microsoft on board with this?

Thiele: We do not use auto-enrollment, which I know makes us a bit of a contrarian. Instead, we worked with Fidelity—our plan administrator—to pioneer a system called ‘easy enroll.’ New employees get an email very early in their tenure with an ‘easy’ button where they can join at 8%, 10%, or 12% contribution and we take care of the rest. That is attached to an auto-escalation of 1% a year, and we find that this easy enroll system is very successful. We already have a very high participation rate—above 90%—and we felt that the people on the sidelines might be there for their own good reasons.

CIO: Last question. Intel’s DC chief Stuart Odell recently told me, “Employees, when you ask them, just want cash compensation. In the DC world, you only have to do as much as the guy next door to attract and retain talent.” Has this been your experience as a tech company plan sponsor? Something tells me no.

Thiele: I lament the thought that quote expresses. I really disagree with it. It’s probably overly cynical and doesn’t exactly reflect the current research. Non-subjective techniques like conjoint analyses—which are very, very statistically valid—show a clear, significant appreciation for retirement contributions and increasing retirement contributions.

We’re very content that investments in our health and retirement plan absolutely get the bang for the buck. These investments earn credit from our employees and credit from the marketplace in attraction, retention, and motivation of our employees. They’re a competitive advantage.