Why corporate pensions are now so rare

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Elliot Raphaelson & Mary Beth Franklin

Lately, public employees and their unions have come under fire for their pensions, which some say are too generous and place too heavy a burden on cash-strapped municipalities and states.

Regardless of where you stand on that issue, a point that is hard to ignore is that public employees are one of the last segments of the work force that enjoy what was once a commonplace in the private sector but no longer is — a defined-benefit pension.

I worked for a large bank for 23 years, and was fortunate to receive a defined-benefit pension plan. That is, I was promised a monthly benefit after I retired that was based on my salary and years of service. This pension plan was guaranteed, was not dependent on my contributing to it, and was not subject to the vagaries of the financial markets.

By contrast, employees who joined the bank after I did were offered a defined-contribution pension in the form of a 401(k) plan. Their plan was an investment account, to which they made contributions — deducted before taxes from their own salaries or wages, with the added benefit of a company match.

Most pension plans dropped

Over the last 20 or so years, many large and medium-sized firms have dropped their defined-benefit plans and replaced them with a defined-contribution plan because it is much cheaper. According to a recent study by researchers at the University of California-Berkeley, today fewer than one in three such firms offer defined-benefit pensions to new hires.

There is no question that employees are much better off with a defined-benefit plan. The difference can add up to hundreds of thousands of dollars.

One major problem with defined-contribution plans is that many lower- and middle-class employees cannot afford to make the maximum contribution.

Also, not all plans have a matching contribution from the employer. And corporations can, and often do, discontinue matching problems whenever they wish.

A second disadvantage is that the final benefit is based on the performance of the investment. If the investments do poorly, the final benefit is smaller. If an employee retires at a time when markets have performed poorly, his retirement can be in jeopardy.

According to the Berkeley study, one in three Americans aged 64-74 in 2005 “lost 50 percent or more of their financial wealth between 1992 and 2002.”

Corporations are not obligated to offer any pension plan. Unfortunately, over the last 20 years, corporations — even those that have done well — have reduced benefits, including pension plans and medical coverage for most employees, even as those for senior management have generally been increased.

Among other things, employers offering pensions persuaded Congress to relax the rules and let them use their formerly overfunded pension plans to help cover other employee benefits, such as retiree health plans and early-retirement buyouts.

Book investigates problems

I highly recommend the new book Retirement Heist: How Companies Plunder and Profit from the Nest Eggs of American Workers by Ellen Schultz (Portfolio/Penguin, 2011). Schultz is an investigative reporter who specializes in retirement issues.

The extensively researched book discusses how corporations have “exaggerated retiree burdens while lobbying for government handouts, secretly cutting pensions, tricking employees and misleading shareholders.”

She cites examples, including anecdotes about many well-known companies such as AT&T, Bank of America, IBM, Cigna, General Motors, GE and others. This book should be mandatory reading for employees everywhere — and for members of Congress.

Some of the most disturbing passages in Schultz’ book describe how companies hire outside “pension consultants” to take away employee benefits and write “explanations” to the employees that are very deceptive. This practice should be illegal, but apparently it is not.

If you work for a corporation that changes its benefits at all, look very carefully at the explanations offered — and don’t accept them at face value. Ask questions of your human resource representatives, who are not necessarily your allies (they represent corporate management).

If your pension and benefits are eroding, unfortunately there’s not a great deal you can do to stop it. The most important thing is to understand the implications, especially for your retirement planning.

If you are one of the many with no retirement plan or a 401(k) that will not meet your retirement needs, now is the time to reassess your investment program to ensure a comfortable retirement.

And if you are covered by a pension, make sure you know the rules. Find out how long it takes to become vested (meaning when you qualify for future benefits) and at what age you can start collecting.

If you are offered the choice of taking your payout as a lump sum or as a monthly payout for life, hire a financial planner or an independent actuary to verify that the lump-sum offer truly reflects the benefits you have earned. It’s your money. Protect it.

Elliot Raphaelson welcomes your questions and comments at elliotraph@gmail.com. Mary Beth Franklin, senior editor of Kiplinger’s Personal Finance magazine, also contributed to this article. © 2011 Elliot Raphaelson. Distributed by Tribune Media Services, Inc.