The Mystery of the Disappearing Pension

For years, employers have been quietly replacing pension plans with 401K programs, and putting retirement incomes at risk.

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Corporate fraud has dominated the headlines for months, and while Congress and the White House have sparred for the moral high ground, an even more disturbing economic development is taking shape that will affect millions of Americans nearing retirement.

The corporate pension is disappearing.

As corporations have switched from defined benefit plans to defined contribution plans, or 401K's, an entire generation will soon reach retirement age with a large number of people unable to retire and maintain their standard of living. According to a study published by the Employee Benefits Research Institute, 58 percent of U.S. households with pension plans in 1998 had to rely solely on a 401K in addition to their social security benefits. This compares to only 38 percent of households in 1992.This puts tomorrow's retirees in a much more risky position than those retiring as recently as 10 years ago. Never has this been more evident than in the last two years, when employees with 401K's have seen dramatic drops in their retirement portfolios. These retirement plans were never meant to replace pension plans, only to augment them.

Employers have been dropping pension plans for one simple reason: They are more expensive than 401K's. Retirees receive a specific payment from the company each month, limited only by how long they live, a payment that's not influenced by economic downturns. The company takes on the risk of a market downturn.

In contrast, 401K retirees are limited to the balance in their account, which fluctuates with the market. Retirees, rather than employers, take on the risk.

Employees also are required to contribute to their 401K's, with companies matching 25-100 percent of the employee's contribution with shares of company stock. This means that 401K's as they currently exist are risky and not diversified. They're also not federally insured. If the company stock plummets, employees could lose most, if not all, of their life savings.

Congress refuses to act

Despite the seriousness of the pension issue, Congress has refused to address it with any urgency. 'Congress is ducking the issues in not addressing a wide range of pension concerns,' says Karen Ferguson, director of the Pension Rights Center. 'They're doing as little as possible and spinning rhetoric that misleads the public into believing they've done something real.'

The House has approved one bill addressing this and two others have come out of committee in the Senate, but all three remain far apart. A bill sponsored by Sen. Ted Kennedy sets limits on how much of its own stock a company can offer to its employees. The other bill approved by the Senate Finance Committee has no such restrictions. Ferguson says Finance Committee members see 'little political gain in change. They're telling employees, all that's needed is notification that it's good to diversify.'

The House version allows mutual fund and insurance companies to serve both as financial advisor and investment manager to an employee whose 401K they manage.Ferguson sees this as an 'acute conflict of interest,' that would make it difficult for an employee to obtain unbiased recommendations. An employee might not receive advice to diversify when the advice is coming from an organization with a stake in seeing the company's stock perform well.

Corporations argue that they give employees company stock as an incentive to work. But Daniel Halperin, pension law expert at the Harvard Law School and a Treasury Department official during the Carter Administration, disagrees. A company's primary motive is to 'have a stable place where the employer's stock will be purchased on a regular basis, will not be sold at any particular whim, and will not be available to anyone planning an unfriendly takeover.' Employees' motive, on the other hand, should be to 'not have a significant portion of their own employer's stock,' according to Halperin.

How does one accomplish this when there are no laws today regulating how an employee's money is matched? Clearly, an employee should have some voice in this matter. And some believe there's nothing wrong with giving employees the right to make their own investing mistakes. But Halperin disagrees. 'We are talking about a federal subsidized retirement program.' Since money deposited into pensions decrease taxes, we have a legitimate interest in trying to make sure that retirement benefits are as insured as possible.'

This is a difficult goal to achieve in a volatile market, however. Even if the Senate and House agree to a bill taking some of the volatility out of pensions, we would still not be dealing with the fact that without a bull market on the horizon, its doubtful whether 401K's, with their limited payout, will be enough to maintain employees' standards of living after retirement.

'People overestimate what $100,000 or $200,000 will buy in retirement income,' says Halperin. He notes that some observers are saying when baby-boomers reach retirement and begin to see how inadequate their 401K's actually are, 'the interest in revised forms of defined benefit pension plans will be renewed.'

Peg O'Hara, managing director of the Council of Institutional Investors agrees. 'You are going to have people retiring without the big piles of money they thought they would. They may not have any. Then, we'll see what political power the baby boomers have to change things.'

And what about the Americans who have no pensions? Today, about half of those working don't have any pension plan. The problem is particularly acute among minority populations and the poor.

The question we're left with is, how do we give voice to those who can make real and systematic changes? Do we need the type of uproar created by this summer's market crash? And wouldn't it be easier to deal with the problem now before retiring baby boomers discover their 401K's will be unable to provide an adequate stream of income, and before taxes have to be dramatically increased to deal with the increased social problems created by an experiment gone awry?

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