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(9/10/02) - In June, puzzling letters began appearing in the mailboxes of hundreds of employees of the Dresser-Rand Company, saying that they had become eligible for retirement benefits even though they were still working.

To request their money, they were told to call the Halliburton Company, which acquired Dresser-Rand in 1998.

Over the summer, many of the employees had done so and concluded that what the letters portrayed as an early payment of benefits was actually a reduction, brought on by the Halliburton merger and a spinoff less than two years later. Halliburton has given the workers 90 days, which ends later this month, to sign up for a much smaller payment than promised earlier, or forfeit their right to a lump sum forever.

In addition to the current employees who got those notices, some recent retirees received letters saying that they had been paid too much and should return thousands of dollars in pension money to Halliburton. After comparing notes, a few of the employees and retirees have estimated that the group is being stripped of $25 million in benefits, reflecting roughly $50,000 on average for about 400 people.

While Halliburton appears to be within its legal rights as the current sponsor of the workers' pension plan, its handling of their retirement benefits contrasts starkly with its treatment of Vice President Dick Cheney, who was chief executive of Halliburton during the acquisition and then the spinoff. The Dresser-Rand workers have lost their early retirement provision, and must now work until 65 to qualify for their full benefits.

When Mr. Cheney left in August 2000 to become the Republican Party's vice presidential candidate, Halliburton's board voted to award him early retirement — even though he was too young to qualify under his contract. That flexibility enabled him to leave with a retirement package, including stock and options, worth millions more than if he had simply resigned.

Pension experts who have looked at the Dresser-Rand case say it shows how the corporate impetus to acquire and divest can wreak havoc on workers. The Dresser-Rand employees were participants in a defined-benefit pension plan — the traditional kind that is virtually impervious to stock market downdrafts and which is insured by the federal government in case of corporate bankruptcy. But even with such bedrock protections, employees can lose pension benefits as a consequence of corporate mergers and spinoffs.

"It's scandalous," said Norman Stein, a pension expert and a visiting professor at the University of Maine law school. "It's treating the assets of the plan as corporate assets that can be bought or sold."

By law, defined-benefit pension assets are to be used only for the benefit of participating employees. The rules, though, are highly complex and open to interpretation. The federal agencies that enforce them are not eager to press too hard, lest companies decide not to offer pension plans.

For Dresser-Rand employees, the problem arose because Halliburton sold the unit 17 months after acquiring its parent, Dresser Industries. Halliburton booked a gain of $215 million from the sale.

Dresser-Rand makes compressors and turbines for the oil and chemical industries; Halliburton is an oil field equipment and services company. Halliburton said the unit had hurt profits in late 1999, and Mr. Cheney announced its sale in October of that year, saying that the deal at an attractive price was in the best interests of shareholders.

After the spinoff, Halliburton continued to administer the Dresser-Rand employees' pension plan. For pension purposes, Halliburton treated the workers as if they had resigned. The plan's assets and liabilities were merged into one of its own, smaller pension plans. Hewitt Associates, a big benefits consulting firm based in Lincolnshire, Ill., advised Halliburton on these steps.

Hewitt declined to discuss any aspect of the case, citing its policy not to comment on client affairs.

Halliburton responded to questions with a statement, saying that the Dresser-Rand employees who had turned 55 before the unit was sold would still receive all their pension options and benefits, as if the acquisition and spinoff had never happened. Officials had considered preserving the younger workers' benefits as well, Halliburton added, but decided not to, because "it would be, in effect, paying for service with Dresser-Rand" after the employees had begun working for the company that had bought the unit. The buyer was Ingersoll-Rand, an industrial conglomerate that has its headquarters in Woodcliff Lake, N.J., and is incorporated in Bermuda.

Halliburton said about 140 workers would get full benefits and about 300 workers were affected by the change. According to Halliburton, it "would have been entirely up to Ingersoll-Rand" to establish a new pension plan for the workers under 55, matching the benefits they had lost as a result of the spinoff.

Paul Dickard, a spokesman for Ingersoll-Rand, disagreed. "This really remains a Halliburton obligation," he said. "It's very clear."

The finger-pointing between Halliburton and Ingersoll-Rand is only part of the employees' problems as they struggle to sort out what happened to the money they were repeatedly told they had coming.

Compounding the confusion, their retirement benefits actually consist of three different pensions, two set up years ago by Dresser-Rand's parent, Dresser Industries. The third was established when Dresser-Rand was created. Many Dresser-Rand employees have been with one entity or the other for more than 25 years, and have participated in all three plans. They have received letters and memos over the years, telling them that their retirement benefits would consist of money from each.

Even more vexing, Dresser Industries has ceased to exist as a result of the Halliburton transactions. Today there is a Dresser Inc., as well as Dresser-Rand, each of which has told the employees it has nothing to do with their pensions. The Prudential Insurance Company of America is also involved, having sold Dresser Industries an annuity contract to finacnce the obligations of the first pension plan.

Finally, the employees say that when they call a toll-free number they are told is for the Halliburton Benefits Center, they talk to people from Hewitt Associates.

Kathleen Joy-Kirkendall, a 51-year-old senior product design engineer who, like many of the Dresser-Rand employees, works at a unit in Olean, N.Y., describes just how hard it has been to get information. In August, she got a statement from Halliburton giving her 90 days to sign up for an immediate lump-sum payment of $15,021. This was less than half of the $31,691 that she was told in 1995 would become available when she turned 55.

"I started asking questions," she said. "Why am I getting this letter? I'm only 51. I'm not ready to retire." She wanted in particular to know the formula Halliburton had used to arrive at the smaller payment.

She remembered her annuity certificate and called Prudential. Prudential told her to call Halliburton, she says. The person at Halliburton told her to call Dresser Inc.

The Dresser Inc. representative took her Social Security number and said he would look into the matter, but never called back. So she called Prudential again. This time, she was instructed to call Hewitt and ask for someone named Jackie Schneider. She did, and was told Ms. Schneider no longer worked for the consulting firm.

"The conversation just stopped right there," she said. "So far, all dead ends."

Ms. Joy-Kirkendall and other employees produced letters dating back to the mid-1980's promising that their pensions, once earned, could never be taken away or modified. Of course, until they reached the retirement ages described in their letters, Dresser and Halliburton could make changes in their benefits.

"As with any benefit plan, Dresser retains the right to amend/modify/terminate the plan," a letter dated 1986 said. But "you will not lose your pension benefits."

Part of the employees' problem arises because these older pension documents — in particular, the ones that told them to expect larger amounts — were calculated on the assumption that they would continue working until they turned 55. That was the plans' official early-retirement age. And many of the employees have kept on working, often at the same desks, until they were within a few years or even months of turning 55.

But when Halliburton sold Dresser-Rand, it treated the employees as if they had resigned and gone to work for Ingersoll-Rand.

As for the retirees who were billed for an "overstated amount," Halliburton said in a letter to them that there was an administrative error uncovered in an audit. The error appears to have affected people who retired after the spinoff.

Haliburton and Hewitt appear to be abiding by their fiduciary duties to recover the money.

"The trustee is obligated to protect the existing plan participants," said Rebecca Miller, a managing director with RSM McGladrey, a business-consulting and tax-services firm owned by H&R Block. "So if they paid people too much, the trustee is almost obligated to say, `Give the plan back the money.' To the extent that the people don't give it back, what happens is the plan has fewer assets, and the employer will have to kick in the difference."

With their 90-day clock soon to run down, the Dresser-Rand employees are contemplating a lawsuit.

If they do sue, it will not be the first complaint filed in connection with Halliburton's acquisition of Dresser-Rand and Dresser Industries, once called the high point of Mr. Cheney's career at Halliburton.

The merger saddled Halliburton with legal claims by people who say they were injured by asbestos in products made by companies that became part of Dresser. The litigation has driven down the price of Halliburton's stock.

Ms. Joy-Kirkendall said that even as she and her co-workers mulled legal action, some have gone ahead and taken their lump sums "even if they were low."

"Their reasoning was that if Halliburton can do this now, Halliburton might think up another legal loophole to get at any money" under its control, she said.

(9/9/02 Issue) - It has been a long, hot summer for Washington's business lobbyists. They couldn't stop tough corporate fraud legislation from sweeping through Congress in July. Now they're bracing for a scorching battle in September over pension reform, a political powder keg because of an electorate angry about shrinking retirement-account balances.

Democrats plan to bring pension reform to the Senate floor soon after returning from summer recess on Sept. 4. Mirroring their strategy on the corporate crime bill, they are pushing legislation that will be tougher on business than the modest changes that passed the House in April.

For their part, GOP leaders are convinced that the pressure to enact post-Enron protections has eased. Stock prices have stabilized, and as of Aug. 23, average 401(k) retirement plan balances were down only 4.3% this year, according to estimates by the Profit Sharing/401(k) Council of America, a nonprofit that represents 1,200 companies that offer 401(k) plans. House Republicans think they can bottle up--or water down--any Senate plan.

Business, however, isn't so confident. The big fear: House Republicans will cave in on pension reform as they did on corporate crime. "No one's betting the ranch on the House holding the line" on pension reform, says Ed Ferrigno, a lobbyist with the Profit Sharing/401(k) Council, which opposes most reforms.

If the campaign trail is any indicator, Corporate America has reason to be wary. On Aug. 26, House Minority Leader Dick Gephardt (D-Mo.) kicked off a four-state swing to promote an Investors' Bill of Rights, which includes strong 401(k) protections. First stop was Merion, Pa., where the new 6th Congressional District includes an affluent swath of Philadelphia suburbs that normally leans Republican. But these are not normal times. "Across the district, I'm running into people who are hurting because their retirement savings have been lost," says Democrat Dan Wofford, who is opposing GOP State Senator James W. Gerlach. The issue could get even hotter when the Senate debate opens--and voters open their third-quarter 401(k) statements. "Pension reform could really surge in September," says GOP strategist Frank Luntz.

Concern about pensions has been high since the 401(k)s of Enron Corp. employees were decimated because they were stuffed with suddenly worthless company stock. The House's response: a minimalist bill that would permit workers to sell company shares in 401(k) plans after three years. It also allows plan managers to offer employees advice about 401(k)s--a move that could lead to conflicts of interest.

Senate Majority Leader Tom Daschle (D-S.D.) is combining rival bills sponsored by Senators Edward M. Kennedy (D-Mass.) and Max Baucus (D- Mont.) into a proposal that lets workers sell company stock after three years but encourages companies to offer independent investment advice only. Workers would also be able to sue company officers and directors for providing misleading information that harms 401(k)s. Other likely fixes that give business fits: requiring most employers to carry fiduciary liability insurance and higher taxes on bonuses over $1 million. "The 401(k) system is voluntary," says Dorothy Coleman, a vice-president at the National Association of Manufacturers. "If you layer too many responsibilities and costs onto it, employers won't be able to provide these benefits."

For now, GOP leaders think that passage of corporate-crime legislation gives them leeway to resist a tough re-write of pension rules. But with Republicans increasingly nervous about the midterm elections, that could change faster than you can say "Kenny Boy."

Edited by Richard S. Dunham

The bear market has clobbered 401(k) accounts--and could spark a revival of defined benefit plans.

(8/1/02) - That rumbling sound you hear in the distance is the growing chorus of very disgruntled employees who now realize that 401(k) account balances can shrink as well as grow--and who have discovered that they're not very good at managing them, anyway. They're calling for a return of the old-fashioned defined benefit plan, or for one of the new pension hybrids that meld features of defined benefit and defined contribution plans.

According to Principal Financial Group's Well-Being Index, a snapshot of employee attitudes about benefits, 24 percent of employees want access to a defined benefit plan, up from 19 percent just a year ago. Surprisingly, some of them may soon get their way. Companies are beginning to reevaluate defined benefit plans, and some are actually implementing them or hybrid plans. The state of Nebraska, for one, recently installed a brand-new hybrid plan for some of its employees.

One Boston-based actuarial consultant, Edward Burrows, reports a recent uptick in new defined benefit plans at small professional- services firms, such as law, consulting, and accounting practices. Small companies have typically shied away from defined benefit plans because of the ongoing financial liability they represent. But the recent relaxation of statutory limits on maximum benefits and contributions for "top heavy" pension plans--and the undoubtedly shrinking 401(k) plans of the owners themselves--are paving the way for companies to adopt them.

But defined benefit and hybrid pension plans face a slew of roadblocks--some old, some new--that could make them difficult for employers to implement or upgrade. Still, businesses large and small feel pressure to do something to provide stable retirement income for their employees, and to do it now.

"They Just Let Them Go"

Until 1981, when the Internal Revenue Service gave provisional approval to the first 401(k) plan, defined benefit plans were more often than not the only retirement plan available (except for Social Security). But once the 401(k) was hatched, defined benefit plans began to fall out of favor. In lieu of perpetual funding concerns, high administrative costs, and annual premiums to Pension Benefit Guaranty Corp., a 401(k) plan offered optional employer matching, low administrative costs, and no premiums. Employees lost a guaranteed (albeit fixed) retirement benefit, but gained portability and the prospect of hefty stock-market gains.

As 401(k)s became more popular--the number of participants swelled from 7 million in 1983 to 42.1 million in 2000--the fledgling high- tech and services businesses of the New Economy didn't even bother setting up defined benefit plans, using 401(k)s as the primary employee retirement vehicle. The defined benefit plan seemed slated for extinction--an expensive encumbrance of Old Economy companies, at which workers often spent their entire careers.

Indeed, a recent study shows that "once a company installs a 401(k) plan, they just let their [traditional] pension plans deteriorate," says Teresa Ghilarducci, associate professor of economics at the University of Notre Dame and lead author of the study. "They don't enhance the pension benefits, they don't adjust for inflation. They don't aggressively manage them. They just let them go." Even if a company keeps its defined benefit plan, a 401(k) plan has the effect of reducing the total amount of money per employee that employers contribute annually anywhere from 14 percent to 22 percent, according to Ghilarducci's study.

This reduction in total retirement contributions, say some observers, is not just an outcome of moving to 401(k)s, but also a consequence of soaring health-care costs. "[A chief] factor was that the price of health care was using up dollars that were allocated for benefits," says Daniel Houston, senior vice president at Principal Financial Group. In smaller companies in competitive industries, cuts have to come from somewhere, and cutting health care can incite even more worker ire than cutting retirement benefits.

Meanwhile, experts claim that employees have generally placed a low value on defined benefit plans. Unlike the user-friendly 401(k), defined benefit plans don't usually come with personalized quarterly account statements displaying a "personal rate of return" on page one. Employees can't watch their nest egg grow online, in near-real time. Defined benefit plans have traditionally existed out of sight, somewhere in the corporate finance department.

Underperformers

No longer. With the end of the bull market and the implosion of Enron, employees have realized that their hard-earned savings can dwindle, if not disappear, in a 401(k). New studies have shown that 401(k) plans are underperforming the market and coming nowhere near to replacing preretirement income for most employees.

The problem is exacerbated by employees' general lack of investment knowledge. A recent survey of defined contribution plan participants by John Hancock Financial Services found that 40 percent of respondents say they have little or no investment knowledge. Fifty percent say they don't have time to manage their investments. "Human nature may be the Achilles' heel of the 401(k) system," says survey author Wayne Gates, general director of market research and development at John Hancock.

The end result of the shift to 401(k) plans is that employees have considerably less money to retire on today than they had 20 years ago, according to research conducted by Edward N. Wolff, an economics professor at New York University, and the Economic Policy Institute, a Washington, D.C.-based think tank. A recent study by Wolff shows that retirement wealth (defined benefit and defined contribution benefits plus Social Security benefits) for the median (or most typical) household headed by a person aged 47 to 64 declined by 11 percent from 1983 to 1998--despite an increase in the Dow Jones Industrial Average of more than 730 percent. Only households in that age group with more than $1 million in preretirement income saw an increase in total retirement wealth.

In addition, the percentage of households approaching retirement that would be unable to replace half of their preretirement income rose from 29.9 percent in 1989 to 42.5 percent in 1998, according to Wolff. (Studies indicate that in order to maintain their preretirement standard of living, retirees need to replace 75 percent of their preretirement income.)

Bang For The Buck

Given the new information about 401(k) plan effectiveness, or lack thereof, as a retirement vehicle, some corporations are reevaluating the best way to get the most bang for their retirement-plan buck while meeting the needs of a mobile workforce.

"The question that employers should be asking is, 'What do I want to accomplish with these plans?'" says Steve Kerstein, managing director of the global retirement practice at Towers Perrin, a management consulting firm. "To whom do you want to provide the benefits? Is your goal to maximize the amount of money to people who retire, in which case you'd choose a DB plan, or is your goal a more equitable distribution of profits, which would mean a DC plan?"

The variety of defined benefit and defined contribution plans has increased in the past few years. Cash balance plans--a hybrid mix of defined contribution and defined benefit that allows employees to take their balances with them if they switch jobs before age 65-- represent a good choice for companies looking to adopt their first defined benefit plan. But it's unlikely that companies will flock to these plans. Regulatory agencies and the courts are still trying to determine which method will be used to calculate payouts. (Meanwhile, many companies that converted to cash balance from traditional pensions face accusations that the new plans shortchanged older workers.)

Another option on the drawing board is the DB(k) plan, created by Principal Financial Group, which would allow employers to consolidate a defined benefit plan with a 401(k) plan. The plan would allow companies to file only one set of related documents with the government, and would consolidate other reporting requirements as well. But absent necessary legislative changes, the DB(k) plan won't fly.

Even with the renewed interest in defined benefit plans, there are roadblocks keeping employers from adopting them--most notably, cost. The stock market reversal means many companies have to pony up contributions to underfunded plans, which represent a long-term, fixed financial obligation. And internal plan administration is expensive; companies must fill out a Form 5500 for every benefit plan they sponsor. (Just one Form 5500 at a major insurance company was 16 inches thick, says a spokesman for the Employee Benefits Research Institute.)

All this means that just as employees start to demand defined benefits, employers are less likely to want them. As a result, some groups are pressuring Congress to ease up on defined benefit plan administration rules and craft new rules that would build more flexibility into funding requirements. But these battles are just beginning. In the meantime, a nation of aging baby boomers marches inexorably closer to a "very severe retirement crisis," says economist William Wolman, co-author of the recently published book The Great 401(k) Hoax. "And we're going to need a real crisis before something gets done about this."

Sadly, by the time something does get done, it will be far too late for many retirees.

(8/16/02) - NAPERVILLE, Ill. -- In the 1990s, Drew O'Connor was the family tortoise, plodding along at a low-paying but secure public job. He quietly envied the hare: his first cousin Michael Lassandrello, who earned twice his salary as an engineer at a fast-growing telecommunications company.

But, now, as the golfing buddies and former parochial-school classmates near retirement, their financial fortunes have been reversed. Mr. O'Connor has overtaken Mr. Lassandrello. The reason: their pensions.

Mr. O'Connor, a 51-year-old Illinois tax investigator, has an old- fashioned pension plan, the kind that pays a set monthly income for life. And it's a generous one: At the end of the year, he expects to take advantage of an early retirement program and draw a $54,000 annual pension, or 75% of his current salary.

Mr. Lassandrello, 50, like most employees of private companies, has long relied on a 401(k) retirement plan. When the stock market soared, his nest egg seemed destined to provide a more comfortable retirement than his cousin's pension. But in the market tumble of the last two years, Mr. Lassandrello's retirement savings plunged 30%. If he stopped working now and wanted to be sure he wouldn't outlive his money, he could draw just $28,000 a year.

During the biggest stock-market downturn in a generation, the Illinois cousins demonstrate a telling new feature of the American retirement system. The extended bull market helped popularize 401(k) plans, which happened to be introduced just as the long boom began in the early 1980s. But this year's stock rout has exposed their risks -- and the advantages of guaranteed-payment pensions. Old-fashioned pensioners, a vanishing breed, have become unexpected winners compared with the swelling population of workers who rely on 401(k)s.

Over the last 20 years, private corporations have been rapidly shifting away from traditional pensions. More than six in 10 U.S. workers with retirement coverage rely primarily on 401(k)s and similar plans for their retirements. Even the federal government has used 401(k)-like plans as part of the retirement package for new civilian hires since 1987, while longer-standing employees can choose to retain their rich traditional pensions.

But there have been notable holdouts. Many unionized workers, including those in state and local governments and the auto and airline industries, stuck with the old approach -- an assured payout based on salary and years of service.

Now these employees, if they are nearing retirement, can hardly believe their good fortune.

"I don't want to flaunt it," Mr. O'Connor says. "I remember when everyone was building up millions in their 401(k)s. I thought, 'My God, how good they had it.' Now they're going to struggle for I don't know how long. All of a sudden, I'm the guy who looks like he's got the bull by the horns."

Meanwhile, Mr. Lassandrello, who long felt secure with his six-figure salary and rising 401(k) balance, is left to wonder. "I'm thinking maybe I should have been a police officer or a firefighter or something with a pension I can count on," Mr. Lassandrello says.

William Dudley, chief U.S. economist at Goldman Sachs, says the evaporation of retirement savings in the stock market could well inspire "a swing back to traditional pensions."

Already, a push to let workers invest a portion of their Social Security payments in the stock market has lost its steam in Washington, though President Bush says he still favors the idea.

Now, some Congressional Democrats, including Rep. Robert Matsui of California, are considering legislation over the next year that would prod companies to pool together to offer traditional pension plans that workers could carry from one job to another. One possibility: tax incentives for companies that elect to do so.

"As the baby boomers retire and feel they don't have enough money to make ends meet, you will start to see some political pressure to bring back traditional pensions," Mr. Matsui says. "It's an issue that isn't going to go away."

Businesses have little interest in returning to the old days. Corporations began looking for ways to scale back traditional pensions in the 1970s, after Congress required them to beef up the plans' funding to make them more secure. Executives were worried about the cost of providing those pensions, known as defined-benefit plans. The reason: The unknowable cost of guaranteeing a fixed monthly payment for a lifetime of retirement.

In the early 1980s, the Internal Revenue Service approved the use of 401(k) plans for tax-deferred retirement savings. The plans transferred the risk of investment from companies to their employees. Employers no longer had to guarantee a certain lifetime benefit, just make contributions. Workers generally had to shell out their own money before they received benefits. In return they won more control over how the cash was invested and could take their retirement funds with them when they changed jobs.

Thanks to the rising stock market, the return on workers' investments soared, along with the number of plans. Still, top corporate executives, by and large, preserved their rich guaranteed pensions. And public-employee unions have been especially resistant to exchanging the security of fixed pensions for the risks of 401(k)- type plans. Gerald McEntee, president of the American Federation of State, County and Municipal Employees, says corporations pushing 401 (k)s have "tried -- successfully -- to sell a bill of goods to workers."

State and local employees, whose average pay was about $38,000 in 2001, typically receive pensions ranging from 50% to 60% of their final pay if they work most of their careers for a single government, according to the National Conference of State Legislatures in Denver. In law-enforcement jobs, that figure often rises to 75%.

Employees' Choice

Some states have created 401(k)-like plans for their workers, but in most cases, employees can choose to join a plan or keep their old- style pension. Often, the defined-contribution plan merely supplemented traditional pensions. Florida started offering a 401(k)- like plan to its 600,000 employees this year that would replace their traditional pension. Only 3,000 have chosen to switch so far.

Traditional pensions also have taken a wallop in the plunging market, but the losses don't generally affect workers' guaranteed payouts. The government-sponsored Pension Benefit Guaranty Corp., funded by employer premiums, backs basic corporate pension benefits up to $42,954 a year for people retiring at 65. Taxpayers back public pensions directly. In 2001, 51% of state pensions were under-funded, according to a new study by Wilshire Associates Inc., a Santa Monica, Calif., advisory firm, up from 31% from 2000. If markets don't recover, taxpayers will have to make up the shortfall because governments are on the hook.

Looking at their recent quarterly statements, many 401(k) holders undoubtedly wish others were bearing their risk. Even before this year's bear market, total assets in 401(k)s dropped 10% from 1999 to 2001, to $1.64 trillion -- including new contributions -- according to Cerulli Associates, a Boston consulting firm. With about three- quarters of all 401(k) assets in stocks, Cerulli analyst Luis Fleites figures assets dropped at least a further 9% this year.

But employees with old-line pensions have been spared that blow.

For years, Seth Goldsmith, a professor of public health at the University of Massachusetts at Amherst, grumbled about his retirement fund missing out on the stock market's stellar gains. His complaints disappeared in June, when he retired amid the stock market's swoon. Prof. Goldsmith, 61, started receiving 63% of his final salary of about $92,000, roughly a $58,000-a-year pension.

Prof. Goldsmith would have had to amass $957,000 in a 401(k) -- from his own contributions, his employer's, and his investment returns -- to achieve that kind of guaranteed income stream for life, according to Financial Engines Inc., a Palo Alto, Calif., firm that advises employees in 401(k)s. (The company came up with that figure by calculating his cost of buying an annuity of that size upon retirement, considering his life expectancy and other factors.)

"It's like I walked into the 7-Eleven, bought a lottery ticket and I scratched five numbers and I won," says Prof. Goldsmith, who lives in Hollywood, Fla.

In Ohio, Wilbur Burke worked 23 years as a supervisor for a state hospital for the criminally insane, earning $12,500 a year when he retired 24 years ago. These days, he lives comfortably on his $25,000- a-year pension, which began at $9,400 but has risen with inflation. Mr. Burke says he is glad he doesn't have to worry about stocks, or a 401(k); he was never able to save much on his salary. To match his pension payment, he would need to have socked away $182,200 in a 401 (k) when he retired in 1978 -- or $486,500 in today's dollars, according to Financial Engines.

"I'd hate to depend on investing," says Mr. Burke, 77, who lives in Elida, Ohio. "I don't know much about it. If you had a little money to spare, I guess it would be OK. I never had any I could afford to lose in the stock market."

Unrewarding?

In New York, Philip Fier, a New York City high-school-chemistry teacher, knew his two grown children, a hedge-fund trader and a corporate executive, felt he was toiling at a noble, but financially unrewarding, profession. But Mr. Fier recently shared the details of his pension with his daughter, who has a 401(k), and she was floored.

In 1995, at age 55, Mr. Fier retired after more than 32 years in the New York City public schools. He receives a pension of about $47,000 a year. His wife, Rhoda, an elementary-school teacher, recently retired with an annual pension of around $23,000. The Fiers would have needed $1.2 million in a 401(k) to buy an equivalent annuity, by Financial Engines' tally.

Mr. Fier says the couple, who live in Brooklyn, are now scouting out co-ops on the pricey Upper West Side. "You work for a big corporation with nice perks," Mr. Fier, 62, told his daughter. "My perks come after I retire."

The fathers -- both police officers -- of Messrs. O'Connor and Lassandrello, the Illinois cousins, often extolled the virtues of their own public-sector perk. "Is there a pension?" Mr. O'Connor's father would ask him, when they talked careers. "What are you going to do 25 years from now?"

The cousins grew up a block apart on Chicago's blue-collar South Side. Mr. Lassandrello first tried the public sector, working as an apprentice police patrolman for two years after high school. After graduating from college with an electrical-engineering degree, he joined a succession of telecom firms, and finally hooked up with Tellabs Inc. in 1988 as an engineering manager.

From the year Mr. Lassandrello was hired until the end of 2000, the Naperville, Ill., optical networking company's stock rose 80-fold, adjusted for splits. At one point, he figures his Tellabs stock alone was worth $400,000.

Mr. Lassandrello and his wife, Rita, bought a four-bedroom home in Naperville, where they lived with their three children, now ages 17 to 20.

Like many employees, Mr. Lassandrello, who earned a six-figure salary, stuffed his 401(k) with company stock -- as much as 40% of his retirement savings -- with most of the rest in stock mutual funds. Tellabs matches employee contributions to 401(k) plans dollar for dollar, up to 3% of their salaries. In a related program, the company contributes another 5% of the employee's pay, also to be invested by the worker.

Mr. Lassandrello says his retirement savings peaked at $850,000 in 2000. But he once figured he could save $2.5 million, including the exercise of stock options, by the time he needed to stop working. "Life was good," Mr. Lassandrello says. "I was set."

Now, with the collapse of the telecom sector, Mr. Lassandrello says his retirement savings have shrunk to $600,000, even though he averted even more damage by wisely unloading Tellabs stock from his 401(k) in late 2000. The company's shares are now down about 90% since July 2000. Financial Engines says his nest egg could now be counted on to generate only $27,800 a year if he were to retire this year and buy an annuity.

For now, Mr. Lassandrello has more immediate worries. In April, Tellabs laid him off as part of a big restructuring. Now, he scours the Internet and calls friends looking for scarce jobs out of a makeshift office in his living room. Despite his best efforts, he says he can't help getting "a sinking feeling in my gut."

Until this year, Mr. O'Connor, Mr. Lassandrello's cousin, worried he was missing out on the bull market. "I thought Mike had the goose that laid the golden egg," Mr. O'Connor says. In 1985, Mr. O'Connor joined the Illinois Department of Revenue as an $18,000-a-year special agent who ferrets out tax cheats. Although he wasn't able to save much, he climbed the ranks of the department, to become a senior special agent, earning $72,000 a year.

Through a special program to encourage early retirement, Mr. O'Connor will be able to leave with full pension benefits at 51 instead of waiting until he's 55. He expects to receive $54,000 a year, which will adjust annually for inflation. According to Financial Engines, Mr. O'Connor would need to have accumulated $1.1 million in a 401(k) plan to match that income stream.

After he leaves his job, Mr. O'Connor hopes to work as a private investigator for a few years. Divorced, he expects to use that money to pay the college bill of his son Patrick, 19. Then, he plans to buy a small condo on the Florida coast.

"I'm walking on a cloud right now," says Mr. O'Connor, who also lives in Naperville a few miles from his cousin. "I don't think there's a company out there that would let me start working at age 34 and stop working at 51 and give me a pension at 75% of my salary."

The two cousins sat recently around Mr. Lassandrello's kitchen table. Taking a break from work, Mr. O'Connor wore a dark suit, gray tie and carried a black briefcase, with a Glock 9mm pistol inside. Mr. Lassandrello wore shorts and a white polo shirt, with Tellabs embroidered on the right shirt sleeve.

Mr. Lassandrello can't help thinking about the time he worked on the Chicago police force. If he had stayed on 32 years, he now would have been eligible for a fat fixed pension. "Sometimes, I wonder if I would have been better off," he says.

Brendan Rees is a research analyst with the AFL-CIO’s Office of Investment. TomPaine’s Steven Rosenfeld interviewed him about the impact of the falling stock market on employee pension funds.

TomPaine.com: There have been a number of reports in Business Week, in The New York Times, that pension funds managed by private companies and some state governments, were heavily invested in the stock market and now face shortfalls in payouts to retirees, totaling perhaps hundreds of millions, if not billions of dollars. Is this true?

Brandon Rees: Workers’ pension funds in the United States own approximately 20 percent of all equities. Since the market’s peak in May of 2000, we estimate that those funds have lost about $1.5 trillion in equity [value]; over $7 trillion has been erased by the market’s collapse. Now there’s a distinction between [employer-funded] defined-benefit pension plans and [employee-funded] defined-contribution or 401(k) plans, in terms of their exposure to stock market risk and in particular, to the employer’s own securities.

During the 1990s market boom, single-employer plans -- defined-benefit plans -- were riding the ever-increasing stock market prices, and accordingly companies, and also, some state governments, took what were termed ‘pension fund holidays.’ They didn’t contribute anything to these plans years after years. So, for example, General Electric has not had to contribute to its plan for many years, and in fact, the increase in the assets in GE’s plan has actually contributed back to GE’s own bottom line.

So now that you have a reversal in that story, it is possible that employers will see an increase in their own pension liabilities. But that pales in comparison to what’s been going in the 401(k) or defined-contribution sector, where employees, individuals, have been bearing the market risk; such as a 401(k) participant who was hoping to retire next year and had their life savings in the stock market. These are dramatically different stories.

TP.c: Business Week says companies that have shifted pension funds into the stock market now face hundreds of millions of dollars in shortfalls. Is that true, or is that anything that should be a cause for concern?

Rees: Well for years companies have been using pension fund surpluses to bolster their own bottom line -- in the form of earnings window dressing. Many of these plans were so over-funded, and companies like GE were so miserly in terms of increasing the benefit levels, that they had these enormous surpluses. Now those surpluses have been erased and that according is going to directly impact corporate earnings.

Company contributions to the plans may increase as a result of it, but given the diversification and professional management of defined-benefit pension plans, they are relatively less impacted than, I believe, say, consumer spending, as a result of 401(k) balances dropping. That’s probably a much more significant risk to economic performance, is what’s happening in individual spending as a result of enormous 401(k) losses, relative to defined-benefit plans.

TP.c: It seems like the most relevant issue to talk about now is the accounting standards. The issue of responsible accounting extends beyond annual reports or quarterly reports to companies. It extends to pension fund management and other things like that.

Brandon Rees: Right, in addition to accounting reform, you are also talking about executive compensation reform. And in particular in regards to performance-based compensation, executives have had an interest in using pension fund surpluses to contribute to their own bottom line and then receive performance-based pay increases based on it, simply because the stock market was rising.

Executive compensation is important in its own right because that’s money coming out of shareholder’s pockets going to executives. But it’s also important as the motivator of executive decision-making. That’s what’s driving executive decision-making, and if the system is set up so companies can dress up their earnings using pension fund surpluses, executives will be tempted to do so. And then when you do have a fallout, as we’re currently going through in the stock market, the chickens are going to come home to roost for those companies that used those accounting gimmicks.

-Sunday, July 28, 2002; Page H04

Over the past 15 years, there has been a massive shift of risk in America's private retirement system. The risk has gone from employers to employees.

With the explosion of 401(k)s and similar plans, many as replacements for traditional pensions, workers have been forced to take on the burden and the consequences of making their own investment choices.

In traditional pension plans, the company typically pays for and manages the investment fund, and the plan promises a lifetime stream of income to the retiree. In a 401(k), the worker chooses the investments and pays for them, often along with a matching contribution from the company, and at retirement keeps whatever the account contains.

Employers and their allies use terms like "taking charge" and "controlling your own destiny" to describe the concept behind these new accounts. They rarely refer to it as "assuming the risk," but that's what it is.

Now that the stock market has gone into reverse, workers are starting to grasp the magnitude of that risk. But what they see in their poorly performing investments is only part of it. When they actually reach retirement, the level of risk becomes vastly greater.

Retiring with only a 401(k) account or some other lump sum is to play a game, and actuary Charles Commander calls it "You Bet Your Life."

That is because the retiree has to figure out how much she can take out each year without knowing (a) how long she will live, or (b) how the market is going to perform.

Worse, in retirement it becomes difficult, if not impossible, to recover from market downturns if you've withdrawn too much.

A retiree living on the money from her 401(k) is going to be making withdrawals to pay living expenses. If the market is going down while she is doing this, the withdrawn money will not be there when the market recovers. In other words, she will be locking in those losses. And if the account and Social Security are all she has, she may have little choice.

If the downturn comes early in her retirement, the results can be devastating, even if the market recovers briskly.

This means that those comforting models -- often found on the Internet and sometimes used by planners and employers -- that use average market returns to figure how much a retiree can safely withdraw are not reliable.

"I think it puts an individual in a no-win situation," said Commander, who is a consulting actuary in the Wellesley, Mass., office of Watson Wyatt Worldwide. The market rarely returns its long-term average. Instead, that average is almost always a combination of highs and lows. How long your money lasts will depend greatly on whether the highs come first or last in a particular period.

Said Commander: "I would hate to be a retiree from two years ago."

To illustrate, John Begley of T. Rowe Price, the big Baltimore mutual fund company, has done some calculations that show what happens to an investment account when the market does well early in a person's retirement, vs. what happens when the market does poorly at the start.

Begley noted that if a retiree's portfolio returned 9 percent each year -- close to the historic return for stocks -- a retiree could withdraw 7.27 percent the first year and keep withdrawing at that level, plus adjustments for 3 percent inflation, for 25 years before running out of money.

But when actual returns are used, the results are quite different. People who retired into the hot market of the 1990s are likely to have plenty of money after 25 years, while those who retired in 2000, just as the market started down, are likely to run out of money early.

Begley analyzed three cases using a conservative methodology. In each case, the retiree starts with a nest egg of $500,000 that is 60 percent stocks, 30 percent bonds and 10 percent cash. She withdraws 7.27 percent, or $36,350, the first year. Subsequent withdrawals are adjusted to keep the purchasing power of that $36,350 even with 3 percent inflation. Expenses are assumed to be drawn at the beginning of the year and returns added at the end of the year. The difference in the three cases is that one starts retirement in 1990, one in 1995 and one in 2000.

The returns they receive on their portfolios are actual up through this year (through June 30) and then are assumed to level out at an amount that results in each retiree achieving an average return of 9 percent over the 25 years.

Though all three achieve an average return of 9 percent over 25 years, the outcomes are quite different.

After 25 years, the 1990 retiree still has slightly more than a quarter of a million dollars, and the 1995 retiree, who retired into the big run-up of the late '90s, has about $480,000.

But the 2000 retiree, who walked out into the market retreat, exhausts her account in 15 years.

T. Rowe Price earlier did similar calculations for returns from the 1970s into the 1990s and got similar results. Using the actual numbers, when the market tanked during the '70s, people ran out of money. When the numbers were run backward, with the high returns of the '90s coming first, they ended up with money left.

Because of this uncertainty, T. Rowe Price's advisers suggest, "as a rule of thumb," that clients start out with withdrawals of 4 percent, Begley said.

"Back in the '90s, people couldn't understand why we'd start out so low. It makes a lot of sense to a lot of clients now," he said.

Compounding the problem, retirees can't really know how long they'll need the money. So timing your withdrawals to run out of money after 25 years -- even if you could do that -- might not work.

This is where the professionals running traditional pension plans have another advantage. Their actuaries can tell very accurately how long the people in their retiree pool will live. They know how many will die at 65, how many at 85, and how many will live to 105. They don't know which ones, but they know how many, and that allows them to predict quite well how much money they'll need to pay the promised benefits.

Retirees whose actuarial pools consist only of themselves can't do that.

"It's impossible to really take all these different measures of risk in a pool of one person and get it right," Commander said.

Retirees with really large accounts or who also have generous traditional pensions generally don't have to worry. But those who will be depending mostly on relatively modest 401(k) or IRA accounts face tough choices.

You can, of course, as Commander noted, take out "one over your life expectancy" each year, much as you are required to do under the IRA minimum withdrawal rules. Thus, if your life expectancy is 25 years, you take out 1/25 of your balance. You won't exhaust your account unless you live to be 110 or more, but you will face wide swings in your annual income.

You can also buy a private annuity. These ensure that you won't run out of money, and may be a good idea for some people. However, they have costs -- the insurance company, after all, wants to make a profit -- and depending on the terms, they can end at your death. In that case, if you die early, your heirs don't get anything.

For most people, it boils down to holding spending down as much as possible and hoping for high returns and low inflation. Or going back to work.