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American Stores’ 401 (k) is best U.S. has to offer

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It's been a pretty nice summer so far for the nearly 2,000 employees of Salt Lake-based national food and drug store chain American Stores.

Last month they moved into their new, ultra-upscale office tower downtown, and this month they learn that their retirement plan is the best in all the land.The August issue of "Smart Money" magazine that hits news-stands this week says the 401 plan that American Stores offers its employees ranked No. 1 in a national survey the magazine conducted of the nation's largest corporations. "Smart Money" is the personal finance magazine of The Wall Street Journal.

American Stores' top ranking is no small feat considering it was up against such corporate behemoths as General Motors, American Express, Citicorp, Prudential Insurance, General Electric and Walt Disney, a total of 92 in all.

In an age when more companies are shifting away from traditional "defined benefit" pension plans to "defined contribution" plans such as 401 (where employees, with varying degrees of help from their employer, must take charge of their own retirement fund) a company's 401 plan is now a big incentive for attracting and keeping employees - a major issue in the current tight labor market.

In its survey, "Smart Money" graded corporate plans in six categories:

Enrollment/vesting, the length of time new employees must wait to join their company's plan; company contributions (the most important category to employees); the number of investment choices the plan offers.

The performance of those investment choices; the service the plan offers employees, such as daily monitoring of portfolios vs. only quarterly or annually; and employer monitoring of the funds offered in their plan to assure they are keeping up with the competition.

American Stores scored very high in company contributions, investment choices and investment performance but low for monitoring, service and its required one-year wait before new employees can join. Its total score of 84.6 out of 100 possible points was 7/10s of a point above second-place Merrill Lynch which was hobbled by its five-year vesting policy.

Even American Stores' one-year wait for new employees is considered excessive. Duane Whitney, the company's director of retirement plans, says American Stores is currently conducting a study to determine if the costs of signing up new employees immediately upon hiring would outweigh recruiting advantages.

"We hear from the human resources people that the waiting period is a downer in terms of hiring people," said Whitney.

American Stores spokesman Daniel J. Zvonek said the huge array of investment options the company offers in its 401 plan, more than 150, was a big factor in its top ranking.

Zvonek said more than 70 percent of the company's 50,000 eligible employees participate in the plan, a figure no doubt boosted by the fact that American Stores does not offer a defined benefit pension plan.

The company's employees who are members of labor unions do not generally participate in the 401 although there are a few exceptions. Nationwide, some 75 percent of American Stores' 121,000 employees are union members and have various retirement savings alternatives as part of their union contracts.

American Stores' contributions to its 401 plan is atypical in that it doesn't simply match each employees contribution with a set amount, such as 50 cents on the dollar.

Instead, the company's contribution to each employee's account is allocated depending on the participant's contribution and their annual salary. Last year, the company allocated more than $80 million in matching of employer contributions.

Other corporations ranked high for their 401 plans by "Smart Money" include Freddie Mac (mortgage loans), American Express, Chrysler and Eastman Kodak. Among those with the worst plans were J.C. Penney, PepsiCo, Coca Cola, Safeway and AMR Corp. (parent of American Airlines).

The term 401 stems from a paragraph added to the Internal Revenue Service Code in 1978. It basically said that companies setting up a tax-deferred savings plan could do so only if more than the highest one-third of employees would benefit. Before then, such plans were mostly used to shelter the bonuses of top executives.

According to a study by Fidelity Investments, some 25 million American workers now have more than $1 trillion invested in 401 accounts, much of it in stock mutual funds, one of the main supports of the ongoing bull market.