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Pensions - Page 4 - 2002
A Push for REAL PensionsCBS.MarketWatch.com – by Cecily Fraser – July 26, 2002
(7/25/02) - LOS ANGELES (CBS.MW) -- The collapsing stock market could save the traditional pension from going the way of the dinosaur, with growing interest in a return to the days of guaranteed benefits.
More than 40 million employees who once saw the 401(k) as a smooth path to secure retirement now find their plans falling short, hurt by losses and cutbacks in employer matching contributions. Pension advocates and legislators are taking a hard look at defined-benefit plans to determine whether this "old" system could be more favorable.
Heading off a strike last week, nurses at San Francisco Bay area-based Alta Bates Summit approved an agreement that would grant them a traditional pension plan, offering protection against devalued, tax-deferred 401(k) retirement plans.
"401(k)s are dependent on a volatile market and don't guarantee a secure retirement, don't guarantee a specified amount," said Liz Jacobs, a registered nurse and spokesperson for the California Nurses Association.
The 1,500 Alta Bates Summit nurses will join roughly 42 million other Americans -- including active and retired workers -- covered by traditional private pension plans, according to the Employee Benefits Research Institute.
The new contracts provide for a defined-benefit pension that will guarantee retirees' incomes -- the amount determined by age of retirement and years of service, Jacobs said. For example, an RN who begins his or her employment at age 40 and retires at 65 would be assured a monthly retirement benefit of $6,942.
CNA bases the pension on the following formula: 2.2 percent times the highest five years of compensation ($175,643, or income 25 years from now assuming 4 percent annual increases) times 25 years or service for a total of $96,604. When subtracting $13,297 to account for the Social Security wage base factor, the nurse is gets $83,307, or $6,942 a month.
The nurses had some leverage other workers lack in a weak economy -- with medical staff in critical demand, hospitals would be hard pressed not to extend benefits to retain and recruit skilled nurses. Still, many pension advocates are looking to revive the defined-benefit system, and efforts are underway to grant workers options outside the self-directed account.
"You're seeing the first signs of a possible change in behavior and attitudes," said James Delaplane, vice president of retirement policy at the American Benefits Council.
What's next on the agenda?
In a defined-benefit plan, there are typically no employee contributions, or individual worker accounts maintained. Instead, employers make regular contributions, bearing the risk associated in providing the guaranteed level of benefits. Usually, the promised benefit is tied to employees' earnings and length of service.
Yet there are two major flaws: A lack of cost-of-living adjustments and a bias toward long-service workers, said Karen Friedman, director of policy strategies at the Pension Rights Center in Washington.
High on legislators' agenda is making traditional pensions a "more viable choice," Delaplane said. But to do that, lawmakers will have to deal with several sticky issues, including the portability of plans and employers' ability to adequately fund programs.
Cash-balance plans seek to accommodate a more mobile workforce, combining features of defined benefits and 401(k)s, namely portability and predictability of value. The problem is that regulations applicable to defined-benefit plans have not been updated to reflect cash-balance plans, the America Benefits Council said.
Still, about 20 percent of Fortune 500 companies offer these hybrids, with smaller employers demonstrating an increased "interest in creation," Delaplane said.
Most legislators say the ideal situation would be for employers to offer both 401(k)s and defined-benefit plans. "That's what's typical in large member companies of ours," he said.
Meanwhile, a number of bills have been introduced, including those by Rep. Rob Portman (R-Ohio) and Ben Cardin (D-Md.), to improve pension-plan funding requirements. Many define-benefit plans relied on the 30-year Treasury bond for stability, but that bond is no longer issued.
As a result, required contributions to pension plans have skyrocketed, causing some employers to abandon defined-benefit plans. See full story.
"Congress is starting to recognize that if they want employers to offer defined-benefit plans, they have to make the policy environment simpler, more cost effective," Delaplane said.
Among other points of pension contention the American Benefits Council has identified: The need to make retirement-savings provisions from last year's tax law permanent.
Still, one obstacle to strengthening pension plans is bad timing. Many companies are still grappling with cost cutting and layoffs, and legislators are focused on accounting problems -- which often fall back on misuse of pension funds.
"It's not conducive for employers to pursue reverting to defined benefits," said Lynda French, a pension activist in Austin, Texas who operates the Cashpensions.org Web site. "They're more focused on laying off (people) before they collect (retirement benefits)."
Policy debates aside, fed-up employees not affiliated with a union should think hard about approaching their employers about the need for a more secure retirement plan.
The switch to pensions "is easier to do in a union context because you have the collective bargaining process," but employers will be open to discussion if they start to hear rumblings from a greater number of workers, Friedman said.
Cecily Fraser is Assistant Personal Finance Editor for CBS.MarketWatch.com in Los Angeles.
Public Finds Misery in New Pension PlansDow Jones – July 12, 2002
(7/10/02) - NEW YORK (DOW JONES) -- These days, the traditional pension plan is looking a lot more attractive.
A volatile stock market and a growing litany of corporate scandals from companies such as WorldCom Inc. and Enron Corp. are shrinking employees' retirement savings. As a result, more employees and industry experts are starting to question the wisdom of managing one's own retirement accounts.
In fact, many are yearning for some type of guaranteed income that a traditional pension, or defined-benefit plan, provides. With such a plan, employers are responsible for funding the plan and managing the investments. With a 401(k) plan, or defined contribution plan, the employee makes the contributions and calls the investment shots.
"For most employees now, the 401(k) is their primary retirement plan," said William Arnone, a partner of Ernst & Young LLP's Personal Financial Counseling practice in New York. "That was never the intention ... . It was supposed to be a supplement. There is some concern that the pendulum has swung too far."
That may be particularly true for those who work at technology and other "New Economy" companies such as WorldCom. Although many large corporations typically offer employees a 401(k) and a traditional pension plan, those employed by technology or other New Economy companies are usually out of luck.
When WorldCom last month revealed a $3.8 billion accounting scandal, the Jackson, Miss., long-distance company announced plans to lay off 17,000 employees.
These employees "not only lose their jobs, but their (company) stocks get wiped out" in their 401(k) plans, said Ron Gebhardtsbauer, a senior pension fellow and spokesman at the American Academy of Actuaries in Washington, D.C.
To be sure, WorldCom's 401(k) plan wasn't as restrictive or as heavily loaded in company stock as was Enron's plan. About 60% of Enron employees' 401(k) plans consisted of Enron stock. According to a WorldCom spokeswoman, less than 4% of the company's 401(k) plan assets are currently invested in company stock. That's down from about 55% that was held in company stock at the end of 1999, according to Derek Loeser, an attorney at Keller Rohrback LLP in Seattle.
The law firm is one of several firms that has filed a class-action lawsuit against WorldCom on behalf of retirement plan participants. The lawsuit accuses WorldCom of breaching its fiduciary duty to its employees by failing to tell participants of problems with their investment choice.
Trend Towards DC Plans
Over the past two decades, 401(k) plans have become the primary retirement vehicle offered by companies.
Companies liked the self-directed plans because they were less expensive and burdensome to administer.
Employees liked the plans because they allowed them to capture stock market gains in the late 1990s.
Moreover, people rarely stayed in one job long enough to become eligible for a pension. "Workers figure that unless you stay with a company for a really long time, it (the pension plan) doesn't work out that well," said Jonathan Skinner, a professor of economics at Dartmouth College.
As a result, many high-tech companies that grew up in the late 1990s chucked the old-fashioned pension plan. Even stalwart software company Microsoft Corp. thought it better to do without a pension plan.
When Texas Instruments Inc. made the move to become a full-fledged semiconductor company back in 1997, it shut off its pension plan to new employees and introduced a 401(k). "We believed the 401(k) plan would be more appealing to new hires and more portable to employees who were not here for entire careers," said spokeswoman Chris Rongone.
Overall, the number of workers in the U.S. private sector covered by defined-benefit plans fell to 22.5 million in 1999 from 27.2 million in 1975, according to data provided by the Employee Benefit Research Institute in Washington. During the same period, the number of those covered by defined contribution plans jumped to 53 million from 11.2 million.
Enron's collapse last year, however, highlighted some weaknesses in the 401(k) plan and underscored the need to diversify across and within asset classes, and not rely solely on the 401(k) as the primary savings vehicle. People began to call for the return of the so-called three-legged stool of retirement savings, where each leg represents one necessary form of income: Social Security, personal savings and the pension plan.
At the very least, the WorldCom debacle should spur more discussion and action on the pending pension reform bills in Congress, experts said. Some of the bills, if they became law, would limit employees' holdings in company stock, noted Mark Brossman, partner at Schulte Roth & Zabel, co-head of the New York law firm's employment and employee benefits practice.
But even as businesses continue to add defined-contribution plans, employees are asking for defined-benefit retirement plans, according to a June study by insurance company Principal Financial Group Inc. The second-quarter survey found that roughly 24% of respondents said they wanted defined benefit plans, up from 19% a year ago. About 81% of employees said their companies offered defined contribution plans, compared with 76% a year ago.
Tech Firms Need Change
Despite workers' renewed interest in the traditional pension, it's not likely that companies will shift back to the plans. Rather, experts see an evolution toward a package that offers both plans. At the very least, more workers are being advised to use a traditional plans as a supplement to their 401(k) plans.
Many larger companies that kept their traditional pension plans have converted to cash-balance plans, a hybrid plan that works like a pension but has the features of a 401(k). Pension professionals expect such conversions to increase in the future. And plan sponsors are also exploring newer alternatives that make a 401(k) plan look more like a defined benefit plan, said Ernst & Young's Arnone.
For technology companies, however, there appears to be no move to add defined-benefit plans as a retirement savings option, said Ed Ferrigno, vice president of Profit Sharing/401(k) Council of America in Washington. The pension plan "doesn't meet the culture or the demographics" of technology companies, which seek to attract young, highly skilled, often mobile workers. "You're not going to hire a 25-year-old on the promise of a pension check at 65," he said.
The tech job market has slowed considerably since the dot-com and telecom shakeouts that started in 2000, a factor that may influence the way workers wish to save for retirement.
"I used to think, I could move if I had to move," said a 35-year-old employee of WorldCom's MCI division in Arlington, Va. Today, however, "job security is more important." The employee, who asked not to be named, said she would more likely consider a pension plan as part of her retirement savings in the future.
"Things have changed and people are changing their views," she said. She added: "I could now see more sense of investing in some type of pension plan that will give me more security."
Cash Balance Plan TargetedCBS.MarketWatch.com – by Craig Tolliver - July 9, 2002
(7/8/02) - NEW YORK (CBS.MW) - One of the nation's largest socially responsible investors charged Monday that AT&T's pension plan discriminated against long-term employees.
Domini Social Investments, manager of the Domini Social Equity Fund, said it will press forward with a shareholder resolution at the telecom giant's annual meeting Wednesday, calling on the company to restore certain pension benefits to long-serving employees.
"We told AT&T that we would withdraw the proposal if company management would make a commitment to offer affected employees their choice of pensions," Adam Kanzer, Domini's director of shareholder advocacy, said in a statement. "To date, AT&T has been unwilling to do so, or to discuss these issues with us."
AT&T converted its defined benefit pension plan to a cash balance plan in 1997 -- a move that could potentially reduce the pensions of 30,000 AT&T employees, according to Domini.
The social investor said that it's not challenging AT&T's decision to convert to a cash balance plan, but argued that affected employees should have been given a choice between the old defined benefit plan and the new plan.
Domini, which holds 1 million shares, sponsored a similar resolution last year that gained more than 11 percent of the vote.
The new resolution is co-sponsored by NorthStar Asset Management and United for a Fair Economy, and has the support of the Communication Workers of America, the nation's largest communications union, representing over 740,000 members.
"AT&T has considered the issues and concluded that the cash balances are the best approach for employees, the company and our shareholders," AT&T spokesman Dan Lawler told CBS.MarketWatch.
Capitalizing on the plethora of corporate scandals currently under investigation, Domini charged that the move potentially opens AT&T up to substantial legal liability.
"At the same time, AT&T executives continue to enjoy generous pension increases," accused Domini's Kanzer. "We are simply asking that our company follow the lead of companies like IBM and Aetna by offering affected employees a choice between plans."
Employees in AT&T's Management Pension Plan are pursuing a class action suit, alleging that AT&T violated ERISA and The Age Discrimination in Employment Act.
"These types of decisions only exacerbate the crisis of confidence in corporate management that is sweeping the country post-Enron," Kanzer added.
Cash Balance Plans Still Under InvestigationPlan Advisory Services – June 21, 2002
While it seemed that cash balance issues were going to rest on the back burner as policymakers addressed issues relating to Enron, there have been two recent cash balance plan developments, focusing primarily on the whipsaw problem, that may revive at least this aspect of the cash balance controversy.
The first development is the issuance in March by the Department of Labor Office of Inspector General (IG) of a report finding that in 13 of the 60 plans reviewed, "workers who left employment before normal retirement age did not receive all the accrued benefits to which they were legally entitled; being underpaid an estimated $17 million each year." The IG's conclusions were premised, primarily, on the failure of those 13 plans to properly apply IRS's "whipsaw" doctrine.
The second development was a decision in March by the United States District Court for the Northern District of Georgia, holding that the IRS's application of the "whipsaw" doctrine to cash balance plans is not permitted by ERISA.
In this article we are first going to review, briefly, what cash balance "whipsaw" is. Then we'll describe the IG report and some of the controversy surrounding it. Finally, we'll discuss the decision by the Georgia Federal District Court.
What is whipsaw?
The cash balance "whipsaw problem" arises out of IRS's interpretation of Tax Code sections 411(a)(11) and 417(e). It's a very technical problem, but it has a significant impact on cash balance plan design and therefore cannot be ignored.
The provisions of Tax Code sections 411(a)(11) and 417(e) (and parallel provisions of ERISA) purport to address a fairly modest issue -- how you determine when you can cash a participant out of a defined benefit plan without his or her permission. Under these provisions, if a participant's benefit is worth more than $5,000 (formerly $3,500), he or she generally cannot be involuntarily cashed out prior to normal retirement age. The statutory provisions generally state that, in a defined benefit plan, in determining whether a participant's benefit is worth more than $5,000, a specified interest rate must be used. Prior to 1995, that rate was the PBGC termination annuity rate; thereafter it is the 30-year Treasury rate. This rate (whichever one is applicable) is generally referred to as the "417(e)" rate.
The regulations under the Tax Code, however, go further in applying the 417(e) rate, requiring it to be used in valuing any lump sum payment from a DB plan. Remember that the normal form of benefit under a defined benefit plan must be an annuity. The regulations under Tax Code sections 411(a)(11) and 417(e) require that any lump sum payment of that annuity must be the actuarial equivalent of that annuity. And, in calculating that lump sum present value, the plan must use the rate in Tax Code section 417(e). Thus, from a mere interest rate used for determining whether a participant can be cashed out, the 417(e) rate has become the rate that must be used for valuing any lump sum payment.
Application to cash balance plans
The application of these rules to cash balance plans produce from curious results.
In a cash balance plan, a participant's current accrued benefit is expressed as the balance in his or her hypothetical account. If a participant terminates at, for instance, age 45, and elects to take a lump sum distribution, you would think that you would simply pay him or her the amount credited to his or her account, just as you would in a defined contribution plan. Not according to IRS. Instead, because a cash balance plan is a defined benefit plan, to comply with the regulations discussed above you must go through the following exercise:
Step 1 -- Project the current accrued benefit to normal retirement date (typically age 65);
Step 2 -- Discount that normal retirement benefit back to the date of payment at the 417(e) rate.
For cash balance plans, it is not clear what rate you should use in Step 1, to project the participant's benefit -- that is, his or her current account balance -- to normal retirement age. IRS has (sort of) taken the position that you must project the participant's benefit using the earnings crediting rate under the plan. If you project the participant's benefit at a higher rate than the 417(e) rate, then discount back at the 417(e) rate, you will wind up paying the participant a lump sum that is greater than his or her current account balance. In other words, the plan will get "whipsawed," and the participant will get a windfall, or at least a benefit that is greater than his or her account balance.
Effect on design
The application of IRS's whipsaw theory to cash balance plans has created a significant problem for cash balance plan design. In 1996 the IRS issued a notice (Notice 96-8) saying that it was considering proposing a regulation addressing the application of Tax Code sections 411(a)(11) and 417(e) to cash balance plans. According to the notice, those regulations would allow plan sponsors to pay participants the amount in their account -- and skip the convoluted projecting and discounting exercise described above -- where the earnings credit under the plan was one of a specified group of fixed income indices. While such a regulation would provide some relief, it would inhibit the use of non-fixed income indices, e.g., the S&P 500, that would, in fact, provide returns to participants closer to those available under defined contribution plans.
So that's the problem -- unless the sponsor doesn't care whether the plan gets whipsawed, it will have to use the 417(e) rate (or something like it) as the cash balance plan crediting rate. Or at least that's what the IRS thinks. IRS's position on whipsaw is, as we'll see, controversial. Moreover, despite its expression of an intention (in the 1996 notice) to propose regulations, giving an opportunity for comment on IRS's position, no regulations have been proposed.
The IG report
Taking the IRS position on whipsaw as law, the IG set out to determine if the oversight by the PWBA -- the Pension and Welfare Benefits Administration, the DOL agency in charge of pension regulation -- of cash balance plan conversions "adequately protected participant benefits." The IG focused on the calculation of participant benefits and on whether plans were properly applying the IRS's whipsaw analysis. As noted above, the IG reviewed 60 plans and found that 13 of them were, in its view, "improperly" calculating participant benefits -- for the most part, not applying IRS's whipsaw theory.
The IG found that these improper calculations resulted in workers at the 13 firms being underpaid an estimated $17 million each year. Extrapolating from its sample to the cash balance universe as a whole, the IG estimated that workers are being underpaid between $85 million and $199 million annually. On the basis of these numbers, the IG concluded that additional PWBA oversight and intervention in this area was called for.
PWBA head Ann Combs challenged the IG's conclusion that the IG's data supported a call for more enforcement. As we understand it, the IG was unable to find a random sample using traditional statistical methods and instead used a "judgmental sample" -- culling 60 cash balance plan conversions from a group of 136 self-identified cash balance plans. It then extrapolated the data from these plans to a universe of (according to industry estimates) 300 to 700 cash balance plan conversions. Combs questioned whether this methodology "was appropriate for reaching such a broad conclusion and whether the assumptions used to extrapolate the error from the sample to the overall population were correct."
DOL also pointed out that, while ERISA does include provisions parallel to the Tax Code provisions on which IRS relied to develop its whipsaw theory, IRS and Treasury have been given authority to interpret those provisions. And regulations under them addressing this issue have not been proposed, much less finalized.
Fuelling the controversy surrounding the IG report, Congressman Bernie Sanders (I-VT) published the names of the 13 companies that were allegedly "underpaying" workers. In gathering data for this report, the IG apparently pledged that the names of participating companies would be kept confidential.
A number of industry groups have protested the legal premises (i.e., the validity of IRS's whipsaw analysis), methodology and conclusions of the IG and called for an investigation of the leak of the names of the 13 companies.
Lyons v. Georgia Pacific Corporation
As we noted at the beginning, the provisions of the Tax Code and ERISA on which IRS has relied in applying its whipsaw analysis to cash balance plans do not explicitly address valuation of benefits for payment purposes. Rather, they appear only to address the question of how you value a participant's benefit for purposes of determining whether it is worth $5,000 or less and may therefore be involuntarily cashed out. Many have questioned whether IRS's application of its whipsaw analysis to cash balance plans is in fact justified by the statute.
In its report, the IG relies on the 11th Circuit Court of Appeals decision in Lyons v. Georgia Pacific Corporation for its (that is, the IG's) adoption of IRS's whipsaw theory, notwithstanding that no regulations have been issued. The 11th Circuit in Lyons held that, for distributions in 1994 and prior years, IRS's application of its whipsaw analysis to cash balance plans was valid.
The 11th Circuit's reasoning was that, for 1994 and prior years at least, the statute was ambiguous. It seemed to compel the use of the 417(e) rate in determining lump sum values only for purposes of determining whether a participant's benefit was worth $3,500 (the applicable amount in 1994) or less and could therefore be involuntarily cashed out. But it also included references to the use of the 417(e) rate in valuing amounts of $25,000 and over -- amounts which clearly could not be involuntarily cashed out. In view of this ambiguity, the position of IRS, that the 417(e) rate must also be used in determining the amount of any DB lump sum benefit, did not go beyond the statute.
The 11th Circuit also noted, however, that :
In the Retirement Protection Act of 1994, Congress removed the language relating to the calculation of present value amounts in excess of $25,000, thereby lessening (or perhaps removing) the ambiguity or self-contradictory nature of the [applicable statutory] provisions. That amendment may or may not compel a different conclusion as to lump sum distributions made after the effective date of the 1994 legislation.
In March of this year, the lower court in the Lyons case -- the District Court for the Northern District of Georgia -- decided the question of the validity of IRS's whipsaw theory after 1994. The short version: post-1994, IRS's whipsaw theory impermissibly expands the scope of the statute and is thus invalid as applied to cash balance distributions after 1994.
The recent decision in the Lyons case raises once again the question of whether the whipsaw theory has any application to cash balance plans. The irony of the whipsaw theory is that it generally results in plans crediting lower earnings to participants -- i.e., earnings geared to the 417(e) rate. It's great for plaintiffs lawyers who can dig up a company that -- for whatever reason -- decided to provide a crediting rate in excess of the 417(e) rate. But for the vast majority of plans -- for instance, the 47 plans that, in the IG's sample, apparently did properly apply the whipsaw theory -- it simply means lower earnings for participants.
The Lyons decision is sure to be appealed. With renewed interest on Capitol Hill in re-vitalizing defined benefit plans and (in the wake of Enron) providing an "insured" account-based benefit, we may even get a legislative solution to this problem.
We will keep you informed of further developments in this area.
The Great 401(k) HoaxUSA Today – by Kerry Hannon – June 19, 2002
(6/17/02) - The Great 401(k) Hoax is a hard-hitting evaluation of 401(k) plans, and charges they are Corporate America's way of sidestepping providing pensions for employees.
William Wolman, a senior contributing editor at Business Week magazine, and Anne Colamosca, a former staff writer at Business Week, deliver a disturbing message. Be prepared. It's a bleak tale, but it couldn't be more engrossing.
The American public was hoodwinked, they write, about the gradual erosion of the nation's retirement system. The "going it alone" endeavor ruled the day in the 1990s, with the 401(k) plan portrayed as the perpetual wealth machine.
In their estimation, most Americans are grossly unprepared for retirement. They predict a looming retirement crisis in the USA. They report that, adjusted for inflation, the average American family did not reap the rewards of a stock market that was, overall, robust from 1983 to 1998.
The median 401(k) account at the end of 2000 was only $13,493, down from $15,241 in 1999 — meaning half are below that amount and half above.
The authors say it's a fantasy that it's always a good time to invest in stocks and that a 401(k) will more than compensate over the long haul for a decline in wages.
They remind us that during president Ronald Reagan's two terms, layoffs became common, company benefits were cut and, to make ends meet, two-worker households became common.
The gist of their theory is that economic growth is likely to slow and the stock market to stagnate. They present a compelling argument, comparing the 1990s economy with the 1920s' pre-Depression hoopla and tumble. Wolman was Business Week's chief economist in the 1990s.
Don't get too bogged down in statistics. The text can be a bit pedantic and academic, but the overall theme is strong. It's all about economic hocus-pocus, they write. Real wages are going down, as they did in the 1920s, and Americans are going to face difficult financial challenges as they age. It's the incredible shrinking pension.
There's a contrarian argument for choosing bonds as an investment strategy in the next decade. Caution might be the best way to a comfortable retirement.
Another CEO Goes Down the TubesEmployee Advocate - DukeEmployees.com – June 18, 2002
The New York Times reported that the chairman and CEO of Qwest Communications International Inc., Joseph P. Nacchio, was forced to resign by the board. In true corporate fashion, the company claimed the departure was voluntary. Many a sailor has voluntarily walked-the-plank. Never mind that they had a sword tip in their backs.
There were questions about accounting practices and corporate governance procedures. Mr. Nacchio was accused of being brash and combative with shareholders.
He was said to have erupted during a conference call because analysts dared to ask questions about sales. Arrogant megalomaniacs do seem to take offence at being questioned.
Dismissing Arthur Andersen probably came a little too late. The Securities and Exchange Commission is investigating Qwest, and a number of other companies.
Qwest has had its share of pension problems over the years. Employees and retirees have complained about the loss of retirement benefits. Have you notice that a CEO’s downfall often starts with pension “manipulations”? Their overpowering greed outweighs any concern for their employees. They find that raiding their own pension fund is so easy that they continue to feed their insatiable greed by escalating their “profit binge.” As their greed shifts to other areas, the noose tightens around their necks. They never know what hit them - until it is too late.
Who Gets to Retire?The American Prospect – by Jeff Faux – June 14, 2002
(Volume 13, Issue 11, June 17, 2002)
spend their golden years working under the Golden Arches.
On the day television beamed around the world images of tearful Enron employees stunned at the looting of their 401(k)s by the company's top brass, pension reform became a top congressional priority. As the scandal rippled across corporate America, even George W. Bush could sense the smoldering class resentment. "What's fair on the top floor should be fair on the shop floor," he proclaimed, distancing himself from his old pals at Enron's Houston headquarters.
But W. has always identified with the boys in the executive suite. So it's no surprise that the pension-reform bill passed by the Republican-controlled House in April is more conservative than compassionate. Liberals had expected that the Enron scandal would lead to more worker protections, but the better-prepared House conservatives seized the opportunity to make it even easier for CEOs to use their employees' pension funds to line their own pockets. Still, if the Democrats in the Senate are willing to push back, we could soon see the first battle of a wider, longer-term conflict that will determine whether American workers get to spend their golden years in secure retirement or working under the Golden Arches until they drop.
According to the standard metaphor, retirement in America is a stool resting on three financial legs: Social Security, employee-pension plans, and individual savings. For more than a decade now, the political debate has been diverted by Wall Street's campaign for a privatization "fix" for Social Security -- the one leg of the stool that is not broken.
Meanwhile, the employee-pension leg is splintered and collapsing. With the exception of government employers and large unionized companies, the traditional defined-benefit pension has morphed into the famous 401(k), which is not a pension at all, but a personal savings plan to which the employer makes a defined contribution. The result has been to shift the risk that there might not be enough to retire on to the employee from the employer.
The Enron debacle revealed just how much of a risk that is. First, it showed us that in matters of retirement the fortunes of top managers are typically distinct from, and often in conflict with, those of the ordinary workers. As in so many other companies, management transformed the 401(k) into a source of demand for Enron stock, which fueled its spectacular price rise. A large portion of Enron's contribution to its workers' 401(k)s came, in fact, in the form of company shares, which workers could not sell until they were at least 50 years old. The rising stock price, in turn, enabled Enron's management to keep borrowing fresh cash to hide the firm's faltering revenues. Inevitably the bubble had to burst, and top executives, who understood the company's finances and whose stock was generally not subject to restrictions on selling, could bail out -- leaving the workers' 401(k)s chock-full of virtually worthless stock.
Like so many new economy companies, Enron's executives created a corporate culture that celebrated the enterprise as one big family; in return for unflagging loyalty, Upstairs would always take care of Downstairs. However sincere -- if fleeting -- those sentiments might have been on the part of some of Enron's managers, the 401(k) system created another fundamental divide between workers and their bosses: The 401(k) pitted these two groups against each other in the market for Enron stock. In order to maximize their capital gains before the price of their Enron shares went south, the top executives needed willing buyers to bear the brunt of the anticipated losses. The workers, whose faith in the company was based on false numbers and phony forecasts, were fair game for their supervisors. Any paternalism stopped where the stock market began.
To add insult to injury, the people at the very top of the Enron pyramid also got guaranteed pensions. Ex-CEO Ken Lay, for example, receives $457,000 a year for life.
The heart of any 401(k) reform must lie in reducing the natural advantages of the executives, who have what every market player wants: inside information. This means giving the worker-investor more information, more equal treatment, and a more diverse portfolio in order to reduce the ability of the company managers to manipulate the 401(k).
The net effect of the House "reform" bill, however, is to make things worse. It does make a perfunctory bow toward the interests of worker-investors by permitting them to sell individual shares of stock after holding them for three years. But it puts no limits on the level of company-owned stock in workers' 401(k)s, does not mandate the sharing of information, and fails to provide real penalties for executives who violate the rules.
At the same time, the house bill rigs the playing field in favor of the boss in two other big ways. First, it guts the current law that requires some minimal equity in the plans for higher- and lower-paid workers. Currently, for example, a plan that covers 100 percent of those making $90,000 or more has to offer a similar plan to at least 70 percent of those making less. Given that the federal government is providing more than $50 billion a year in tax breaks to 401(k)s, one would think Congress should insist on some equity. The Republican bill eliminates such conditions, letting companies set up whatever distribution of coverage and benefits they please. It leaves it to the secretary of the Treasury to judge, on the basis of undefined criteria, whether a company's plan is "fair."
Democratic Congressman Pete Stark of California calls this position sheer "claptrappy." Republican Congressman Rob Portman of Ohio counters that it "will help small business[es] to offer plans by giving them just a little relief from the rules." But small business is already exempt from many of the reporting requirements. Indeed, because the secretary of the Treasury would determine what "fair" means, and because small businesses typically don't have the resources to hire Washington lawyers to argue their cases before federal agencies, the vagueness of the language probably makes it even more risky for mom-and-pop businesses to devise their own 401(k)s.
Second, under the guise of assisting workers in picking the best stocks, the GOP bill would allow company managers to use pension-plan funds to contract with outside investment advisers who have a financial interest in steering the worker toward particular investments -- including the company's own stock. As Martin Sullivan of the newsletter Tax Notes observes, "Because it is usually in the self-interest of employers to encourage employees to purchase company stock, the interests of employees seeking investment advice are diametrically opposed to the employers providing it."
For these very reasons, the chief backers of the House bill were the U.S. Chamber of Commerce, the National Association of Manufacturers, and the big financial and insurance firms that sell employee-benefits packages. These corporate lobbies have been trying to get rid of pension restrictions ever since the current law was passed in 1986, and in the post-Enron demand for reform, they saw their chance.
The House bill passed 255-to-163. Some 46 center-right Democrats voted for the GOP plan; only two Republicans voted against it.
The curtain now goes up in the Senate, where the Health, Education, Labor and Pensions Committee, chaired by Ted Kennedy of Massachusetts, has reported out a bill that actually increases pension protections. Unlike the House bill, it does not erode fairness requirements and prohibits companies from hiring investment advisers with conflicts of interest.
In addition, the Kennedy bill restricts the accumulation of company stock in a 401(k) either to shares received as part of the company's contribution to the 401(k) or to those bought by employees as one of the plan's investment options -- but not both. If the company also offers a defined-benefit plan, no restrictions apply. A simpler, stronger proposal by Senators Barbara Boxer of California and Jon Corzine of New Jersey, limiting company stock to 20 percent of 401(k)s, could not get enough support, even though the law limits the level of company shares in a defined-budget plan to 10 percent.
Kennedy's bill also requires more disclosure to workers, mandates employee education on the benefits of diversification, and makes employer abuses a violation of federal law. The most innovative and far-reaching provision of the Kennedy bill would require that workers be represented on the boards of trustees that oversee a given company's plan.
As in the House, however, Democratic conservatives are a drag on the party's ability to challenge the Republican bill and expose its phony populism. Senator Max Baucus, chairman of the Senate Finance Committee, which has joint jurisdiction with Kennedy's panel, wants a bill somewhere "in between" the Kennedy and the House versions. Given the scarcity of issues around which Democrats can rally against Republicans in the November election, watering down the Kennedy bill would remove yet another arrow from the Democrats' quiver.
Beyond November, Democrats need to plunge into the larger issue of retirement security in an increasingly insecure economy. Thus far it's the Republicans who have staked out a clear position: transforming Social Security into something as shaky as Enron's retirement plans. After 20 years, the best conservative minds still have not come up with a privatization plan that will not require major cuts in benefits and/or very large tax increases to go along with the increases in risk. The fact that an overwhelming majority of Republicans do not want to bring any privatization plan to a vote before November suggests that, at least for now, Democrats have the advantage.
For their part, Democrats have concentrated almost entirely on defending Social Security -- which is smart short-term politics. But saving Social Security, necessary though it be, does not solve the fundamental problem: that large numbers of American workers will not have enough retirement assets to support a minimally decent standard of living in their old age.
Fewer than half of all private-sector workers today have any sort of pension- or savings-plan coverage on the job. Among those who do, the percentage with defined-benefit plans has dropped to 29 percent in 1999 from 71 percent in 1975. The share of those with defined-contribution plans has risen to 65 percent from 29 over that time span. And of those, half have less than $20,000 in their accounts.
Young single workers, of course, are notoriously uninterested in saving for retirement. Among households headed by a 47-to-64-year-old worker, however, the share that has any pension coverage rises -- to 73.7 percent in 1998, up from 70.2 percent in 1983. But at this rate of growth, economist Christian Weller calculates, we will reach complete coverage of all workers in 113 years.
One might think that the combination of a shift to 401(k)s and the stock market boom of the 1990s would have stuffed the retirement accounts of the typical American worker. But in a recent study for the Economic Policy Institute, New York University economist Edward Wolff reports that in 1998, 19 percent of households headed by a person 47 to 64 were headed for poverty when they retire, up from 17 percent in 1989. The share of those who would be unable to maintain 50 percent of their pre-retirement income once they'd left the workforce rose to 43 percent from 30 percent. While the average value of the 401(k) rose, the benefits were concentrated in those households with a net worth of more than $1 million. Those with less saw their accumulated retirement wealth decline by 11 percent. For the typical working family, Wolff concludes, "In terms of retirement investment, what should have been the best of times turns into something closer to the worst of times."
The great experiment represented by the 401(k)s -- basing retirement security on voluntary, employer-based savings as opposed to universal guaranteed benefits -- is clearly not working. Unfortunately, the absence of a progressive response to this larger issue allows the right's relentless campaign to privatize Social Security to define the issue. The right has transformed the problem of inadequate retirement security into the problem of Social Security's modest returns relative to the higher -- if greatly exaggerated -- long-run returns from the stock market. Democrats correctly reply that Social Security is primarily a safety net, includes disability and other insurance benefits, and is more efficiently run than the private stock-market funds. And they point out that Social Security was always intended to be just one leg of the retirement stool. All of which is true -- but the brutal fact remains that for so many working people, Social Security is virtually all they have.
Unless Democrats have a plan to deal with that problem, it may be only a matter of time before the Republican assault on Social Security breaks through. Starting next year, the age of eligibility for regular Social Security benefits begins its upward march toward 67 at the pace of two months per year. Polls show that most young Americans don't know that they will have to wait two more years to receive full benefits. And even though this plan was put into law by a commission headed by conservative Alan Greenspan during the Reagan administration, you can bet what's left in your 401(k) that the Republican right will point to this rising-age threshold as more evidence that workers can't trust the government to deliver on its Social Security commitments.
Fortunately, there are proposals upon which to build a progressive retirement security agenda. These include Bill Clinton's 1999 plan for a voluntary national defined-contribution program in which the government would subsidize the savings of low-income workers; Congressman Dick Gephardt of Missouri's proposal to mandate that all employers offer some kind of pension coverage; and economist Teresa Ghilarducci's suggestion for creating incentives for multi-employer defined-benefit plans. What is needed now is a strong signal from the Democratic Party leadership that it will not only defend Social Security but also build support for a broader solution -- setting the stage for a serious, and winnable, debate on retirement security in the 2004 election.
One key question is whether and how to return to the principle of defined benefits. Over the years, liberals have bought into the conservative claim that defined benefits are a relic in this age of deregulated markets and global competition. But the basic principles underlying defined-benefit plans are the same as those underlying annuities, which insurance companies are still selling in this new economy. We should strive to create a national system of defined benefits that is mobile and does not penalize workers who go in and out of the labor force.
The political battle over pensions will be fought over broad themes, beyond the often mind-numbing complexity of pension finance. To succeed, Democrats therefore must redefine the central issue: In this immensely rich nation, there is no reason why millions of Americans who spend their working lives waiting on tables, loading and unloading trucks, or glued to computer screens should have their retirements depend on whether they were lucky enough to outsmart the inside traders in the stock-market casino.
If Ken Lay and George W. Bush can have a defined-benefit plan, why can't we all?
Worker’s Illusion of WealthNew York Times – by Lous Uchitelle – June 7, 2002
(5/26/02) - In the long economic expansions of the 1980's and 90's, the wealth of middle Americans seemed to rise. Their stock portfolios and home ownership gave them the appearance of growing richer. But now it turns out that net worth went down, not up.
That is disheartening, and counter-intuitive. After all, middle Americans did benefit from stock portfolios and homes, increasing their wealth as these assets rose in value. Yet add in all the other forms of household wealth, as Edward N. Wolff, a New York University economist, does, and balance sheets change for the worse.
The main culprit is shrinking pension wealth, although it is not alone. Rising debt, particularly mortgage debt and home equity loans, also took back from wealth what rising home prices had conferred. There is stealth in the damage. People focus on the balances in their 401(k) accounts, for example, and fail to realize that company-paid pensions, now gradually disappearing, would have made them wealthier than saving on their own for retirement.
Not noticing the deterioration in their wealth, they even substitute 401(k) accounts for other forms of savings, putting money in one pot while removing it from another.
"I think the 401(k) is a real scam," Mr. Wolff said. "People get their monthly statements and they say, `Wow, look at how much money is in my 401(k),' and they don't see what has disappeared."
Let's be clear who we mean by middle Americans. They are not the 20 percent of all households whose breadwinners are paid $75,000 a year or more. Those households have increased their total wealth since 1983, the starting point of Mr. Wolff's study. Many have never been richer. That is not the case for the median household, with an annual income of $50,000 or so.
Refine the households even more. Consider those whose breadwinners are 47 to 64, old enough to have accumulated wealth. Add up their wealth from all sources — stocks, bonds, homes, pensions, savings accounts — as Mr. Wolff has done.
He calculates that the median wealth was $162,800 in 1998, the last year for which government wealth data is available. Adjusted for inflation, the same calculation for that age group in 1983 produced $188,100 in wealth at the median. (Half the households had more, half less.) That is a 13.5 percent decline in wealth, and the loss was similar for almost all the households with annual incomes of $35,000 to $75,000, Mr. Wolff found.
The middle class in America is defined by this income range. Nearly 35 percent of households qualify.
Their wealth, after falling from 1983 to 1998, has at best leveled off since then, given the stock market sell-off and the recession.
How would Mr. Wolff reverse the loss? "The most desirable thing may be to re-establish the old defined-benefit pension system," he said, referring to the company-funded pensions that guarantee fixed annual benefit payments in retirement.
Among middle-income households, the breadwinners in 42.4 percent had defined-benefit pension plans in 1998, down from 68.9 percent in 1983. But the number of 401(k) accounts, a k a defined-contribution plans, soared. Some 69.2 percent of households had them in 1998, up from 7.4 percent in 1983.
MR. WOLFF, a recognized expert in wealth and income, is not without challengers. Some say that his definition of net worth leaves out the value of a family's cars, or that the survey data of 1983 and 1998 are dissimilar enough to flaw comparisons. Others question his calculation of the present value of future pensions.
Mr. Wolff contends, for example, that a 50-year-old expecting a $20,000 annual company pension at the age of 65, and suddenly forced to fund it himself, would have to have accumulated $200,000 in savings by now. Ergo, a $20,000 future company pension represents $200,000 in present wealth. The 401(k) savings of households in the 47-to-64 age group, in contrast, average only $69,000.
But for Mr. Wolff's $200,000 to make sense, said Eric Engen, a resident scholar at the American Enterprise Institute, "you have to assume that people don't change employers and they collect the promised pension over enough years."
Whatever the caveats, Mr. Wolff's main point is now widely accepted: The swing from company-guaranteed pensions to 401(k)-style plans has definitely lessened wealth — and also relieved employers of billions of dollars in pension obligations.
"You cannot simply dismiss Wolff's findings," Mr. Engen said.
Stagnant wages, the rising cost of education, divorce, layoffs — all these and more help to explain why household wealth is shrinking. The heartbreak, however, lies in the self-delusion that silences protest.
Mesmerized by 401(k)'s, too many households fail to notice what's missing.