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Companies eager to conserve cash are trimming their contributions to their workers’ 401(k) retirement plans, putting a new strain on America’s tattered safety net at the very moment when many workers are watching their accounts plummet along with the stock market.

When the FedEx Corporation slimmed down its pension plan last year, it softened the blow by offering workers enriched 401(k) contributions to make up for the pension benefits some would lose. But last week, with Americans sending fewer parcels and FedEx’s revenue growth at a standstill, the company said it would suspend all of its contributions for at least a year.

“We will have to work more years and retire with less money,” said Lee Higham, a 44-year-old senior aircraft mechanic at FedEx, who has worked there for 20 years. “That’s what we are up against now.”

FedEx is not the only one. Eastman Kodak, Motorola, General Motors and Resorts International are among the companies that have cut matching contributions to their plans since September, when the credit markets froze and companies began looking urgently for cash. More companies are expected to suspend their matching contributions in 2009, according to Watson Wyatt, a benefits consulting firm.

For workers, the loss of a matching contribution heightens the pain of a retirement account balance shriveling away because of the plunging stocks markets.

“We are taking a beating,” said another FedEx mechanic, Rafael Garcia. “In a year, I lost $60,000 of my 401(k). You can’t make that up.”

To many retirement policy specialists, the lost contributions are one more sign of America’s failure as a society to face up to the graying of the population and the profound economic forces it will unleash.

Traditional pensions are disappearing, and Washington has yet to ensure that Social Security will remain solvent as baby boomers retire and more workers are needed to support each retiree.

The company cutbacks may mean that some employees put less money into their retirement accounts. Even if they do not, the cuts, while temporary, will have a permanent effect by costing many workers years of future compounding on the missed contributions. No one knows how long credit will remain scarce for companies, or whether companies will start making their matching contributions again when credit loosens and business improves.

“We have had a 30-year experiment with requiring workers to be more responsible for saving and investing for their retirement,” said Teresa Ghilarducci, a professor of economics at the New School. “It has been a grand experiment, and it has failed.”

In the typical 401(k) plan, the employer’s matching contribution is more than just money for retirement. It also motivates employees to set aside more of their own money for old age. The more that workers save in a 401(k) plan, generally, the more “free money” they can get from their employers under the matching provisions.

Retirement policy specialists said they did not expect employees to react immediately to the loss of this incentive by stopping their own contributions. Study after study has shown that employees procrastinate when it comes to retirement-plan chores, and in this case the inertia may work, unwittingly, in their favor.

Americans, however, are facing extreme household financial pressure. President-elect Obama has said that he would support allowing withdrawals from retirement plans without penalties, which would provide short-term relief but would further undercut American’s long-term savings.

Benefits specialists said that if matching contributions continued to dwindle, fewer newly hired workers could be expected to join 401(k) plans. And employees might eventually slow or stop their contributions if the recession drags on and their own cash runs short.

“The problem is, we are heading into this serious recession, and we don’t know how long it will go on for,” said Alicia Munnell, director of the Center for Retirement Research at Boston College. “The bottom line is, people will have less money in their 401(k) plans, not just because the financial crisis has decimated their assets, but also because they will not have the employer match for some time.”

Currently, most companies that offer 401(k) plans do provide some sort of matching contributions, according to David Wray, president of the Profit Sharing/401(k) Council of America, an association of employers that provide such plans.

The most typical arrangement is for employers to match 50 cents of every dollar their employees set aside in their retirement accounts, up to 6 percent of pay. Sometimes the match is more, sometimes less, and some employers vary it depending on profitability. Over all, the employer’s cost usually works out to about 3 percent of payroll.

The latest 401(k) cutbacks underscore workers’ vulnerability in an age when companies have been replacing defined-benefit pension plans with the newer 401(k) design. Modern 401(k) plans give workers the power to opt in and out and require them to invest their own money, bearing market risk on their own. That may be appealing when the markets are rising, but it can be terrifying when they fall, as they have recently.

An employer’s contributions to a traditional pension plan cannot be switched on and off at will. Federal rules set a firm contribution schedule, with deadlines and penalties for companies that fall behind. Employers also get significant tax and accounting benefits from operating a traditional pension plan, so they tend to think long and hard before freezing such a plan to save money when the economy cools.

In a 401(k) plan, by contrast, the employer has much greater freedom to stop making matching contributions when times are tough. The contributions are normally measured as a percentage of payroll, and the savings from any cuts are realized immediately. That greatly simplifies planning and making changes.

“Every percent you cut is a percent of payroll,” Ms. Munnell said. “It comes down to the choice of laying people off, or cutting back on some fringe benefits.”

Many of the latest 401(k) cutbacks are turning up in industries with obvious financial problems, like the auto industry, health care and newspaper publishing. Industries that depend on free-spending consumers, like resorts and casinos, are also seeing cuts. Often when one company in an industry cuts its benefits others will follow, to keep their labor costs competitive.

General Motors and Ford Motor have both suspended their matching contributions to their salaried employees’ 401(k) accounts, although their pension plans for unionized workers are unchanged.

Motorola, struggling to stay competitive, stopped contributions to its 401(k) plan this month and froze its pension plan as well.

Other recent cuts have occurred at Resorts International Holdings, Vail Resorts and Station Casinos.

In addition to stopping their 401(k) matching contributions, companies have been freezing salaries this fall, shifting more of the cost of health care to their workers, and laying people off.

“These are really hard times and people are losing their jobs, and in some ways, a suspension of a 401(k) match, while bad, is probably one of the lesser evils out there,” Ms. Munnell said.

In announcing the suspension of the contributions last week, FedEx made clear that its workers in the sorting centers would not be the only ones feeling the pinch. Pay to senior executives is to be cut by 7.5 percent to 10 percent, and the chief executive, Frederick W. Smith, said he would take a 20 percent pay cut. The cutbacks are projected to save $200 million in the remainder of the 2009 fiscal year and $600 million in the 2010 fiscal year.

In Need of Cash, More Companies Cut 401(k) Match,
NYT,
21.12.2008,
http://www.nytimes.com/2008/12/21/
your-money/401ks-and-similar-plans/21retire.html

G.M.’s Pension Fund

Stays Afloat,

Against the Odds

November 25, 2008
The New York Times
By MARY WILLIAMS WALSH

When General Motors left Washington empty-handed last week, among the lingering questions was whether its huge pension fund could topple and crush the government’s pension insurance program.

When any pension fund fails, usually as part of a bankruptcy, the government takes over its assets as well as its payments to retirees. In G.M.’s case, its plan would dwarf the nation’s pension insurance fund.

Still, G.M. appears to have enough money in the pension fund to pay its more than 400,000 retirees their benefits for many years — even with the markets swooning around it. That is largely because of the conservative way G.M. has managed the fund recently, and it explains why G.M. has not joined the long list of companies pressing Congress for pension relief.

But this glimmer of hope in a bleak auto landscape could change drastically, particularly if G.M. struggles along for a few more years, only to go bankrupt. The company’s blue-collar work force is still building up new benefits with every additional hour worked, and the pension fund will have to grow smartly to keep up with those costs.

If G.M. continues paying people to retire early, the costs will grow even more, because the plan will have to pay retirees for more years than it budgeted. And G.M. is not contributing additional money to the plan right now.

Already, G.M. says it will be paying retirees about $7 billion a year for the next 10 years. The fund’s assets were worth $104 billion at the end of 2007, more than enough to cover its obligations of $85 billion. Since then, the assets have declined and the obligations have grown, each by undisclosed amounts. The company says it does not plan to add any money to the fund for the next three or four years.

Even if G.M. were forced into bankruptcy, the government might insist that it keep the fund, and cover any shortfalls with its own money.

“We would maintain that it can afford to keep its plan intact,” said Charles E. F. Millard, director of the Pension Benefit Guaranty Corporation, the federal agency that takes over failed plans. “Based on past history, we think that argument has a reasonable chance of success.”

Whatever its ultimate fate, the G.M. fund may illustrate, against the odds, that it is still possible to offer traditional, defined-benefit pensions even in a historic bear market.

The other American automakers, Chrysler and the Ford Motor Company, also operate pension funds. Ford said that its fund, which is about half the size of G.M.’s, had a small surplus at the end of 2007. Since then, however, it is thought to have suffered a bigger percentage of losses than G.M.’s fund, because it uses a different investment strategy.

Little is known about the Chrysler pension fund today because the company stopped making mandatory pension disclosures when it was taken private in August 2007.

Along with pensions, G.M. has promised to provide health care to retirees, but those medical benefits are not guaranteed by the federal government. The total cost of these benefits in today’s dollars was estimated at $60 billion at the end of 2007, and G.M. had set aside only about $16 billion to cover the cost.

That year, G.M. and the United Automobile Workers agreed to let G.M. cap its health obligations to retirees by creating a separate entity to manage the retiree health plan, and making a big payment. The automaker has said it will make the payment in January 2010, and its retiree health obligations will end then. In the meantime, G.M. has issued securities to cover part of the cost and is holding them in a subsidiary created for that purpose.

The G.M. pension is viable today because of the company’s response to the firestorm at the beginning of this decade, said Nancy C. Everett, chief executive of G.M. Asset Management. The unit manages the company’s domestic and foreign pension funds, as well as other big pools of company money.

In the two years after the tech crash of 2000, most American pension funds suffered their worst squeeze ever. Although the stock market swings are even more severe now, pension funds have been buffered somewhat by relief provisions written into the pension law signed in 2006.

At the time of the tech crash, most pension funds had invested heavily in stocks, and stocks lost billions of dollars in value. At the same time, interest rates fell to unusually low levels, causing a painful mismatch, because low rates make retirees’ benefits more expensive for pension funds to pay. G.M.’s pension fund finished 2002 with a shortfall of almost $20 billion, by far the biggest of any American company.

“That was the genesis of General Motors thinking differently about how to manage the fund,” said Ms. Everett, who was running the Virginia state employees’ pension fund at the time. She joined G.M. in 2005.

Until then, most pension officials thought stocks were their best choice, because stocks were expected to generate more over the long run than bonds. And pension funds were thought to have a long time horizon.

Stocks have also been a favorite pension investment because of a much-criticized accounting rule that rewards the corporate bottom line when pension managers invest more aggressively.

The big mismatch of 2002 showed pension officials that stocks could produce more volatility than a mature pension fund like G.M.’s could bear. The company could not wait for stock prices to come back up eventually, because it had 400,000 retirees waiting to be paid about $7 billion every year.

With that in mind, G.M. sold more than $14 billion of bonds in 2003 and put the proceeds into its pension fund, making up for the preceding years’ losses. It also put in the proceeds of the sale of its Hughes Electronics subsidiary, for a total contribution of more than $18 billion. That was far more than the minimum required that year.

The big contributions got rid of the fund’s shortfall. (They also gave G.M.’s bottom line a lift, thanks to the accounting rule.)

Then, over several years, G.M. overhauled its investment portfolio, replacing billions of dollars worth of stocks with bonds, and adding derivatives to make the duration of the bonds better match the schedule of payments to retirees.

Bond prices can swing too, but G.M. plans to hold the bonds for their interest, not sell them. Ms. Everett said the company believed the interest payments would be more than enough to produce the $7 billion owed to retirees every year.

Currently, 26 percent of G.M.’s pension fund is invested in stocks — well below the typical pension fund’s allocation. David Zion, an analyst at Credit Suisse who tracks corporate pension funds closely, estimates that G.M.’s pension assets have declined by about 15 percent so far this year, compared with a 24 percent decline for the typical pension fund at America’s 500 largest companies. It will be several more months before the size of the losses is known for sure, because companies disclose precise pension numbers just once a year.

When asked why G.M. did not eliminate stocks from its pension fund completely, Ms. Everett cited the controversial accounting rule.

“There’s two sides to this issue,” she said. “One is making sure your pension fund is adequately funded, and the other is that pension income does come into play when you’re looking at the company’s income statement.” No company is eager to eliminate pension income if competitors still have theirs.

The Financial Accounting Standards Board has been working on revisions to keep pension activity from affecting the corporate bottom line, but it is not finished yet.

G.M. has a free pass on the funding rules for the next few years. It holds a so-called credit balance — a running tally of the contributions made in past years that were larger than the law required. In 2006, G.M.’s credit balance was worth $44 billion. The company is using that balance to offset contributions it would otherwise have to make. Over time, the size of the credit balance will fall.

Ms. Everett said modeling exercises showed that a 26 percent allocation to equities was the likeliest way to produce adequate investment returns while also preserving the pension fund’s surplus. She said managing the surplus was her top priority. If G.M. had to make a pension contribution, it would not have the cash on hand to do it. The company has said it will run out of cash early next year.

Meanwhile, the cost of restructuring the company could put a heavy burden on the pension fund. G.M.’s contract with the U.A.W. offers special benefits to workers whose plants are shut down or who are forced to retire early. Invoking these special benefits could make the plan’s obligations soar.

    G.M.’s Pension Fund Stays Afloat, Against the Odds,
    NYT, 25.11.2008,
    http://www.nytimes.com/2008/11/25/business/25auto.html

More companies

may end 401(k) match

28 October 2008

USA Today

By Chris Woodyard

As the economic slump deepens, more companies are expected to join General Motors in suspending matches of contributions to their employees' 401(k) retirement accounts.

GM last week became only the latest on a list of well-known companies trying to conserve cash to weather the downturn by halting 401(k) account matches.

Also among them are Goodyear, Frontier Airlines, commercial real estate firm Cushman & Wakefield, broadcast group Entercom and rental car agency Dollar Thrifty Automotive Group.

Employers typically match a portion of workers' contributions as a way of encouraging them to sock away money for their retirement and as an alternative to funding a pension plan.

Some 2% of 248 employers surveyed this month by human-resources firm Watson Wyatt indicated they have cut back on 401(k) matches as a way of coping with the sinking economy. Another 4% said they may join them in coming months.

Those numbers might be even larger were it not for warnings from experts that cutting back on 401(k) contribution matches can be a morale killer.

"It's penalizing the folks who are doing the right thing (by) contributing to their retirement," says Alec Dike, a senior financial counselor for Watson Wyatt. And the suspensions could backfire on companies because "it suggests you are in worse financial straits than you really are."

But some say the 401(k) system — which has been steadily expanding as pension benefits decline and workers become more responsible for providing for their retirement income — was designed to provide just such flexibility to employers when their business is struggling.

The match is easy to junk because it is essentially a form of profit-sharing by a company, says Jack VanDerhei, research director of the Employee Benefit Research Institute, a Washington think tank.

Frontier, for instance, was kicking in 50 cents for every dollar an employee contributed to his 401(k) up to 10% of his pay, but stopped the matches June 1 after filing for a Chapter 11 bankruptcy reorganization.

For some, it's not the first time. GM's suspension of matches to its 401(k) plan last week for 32,000 eligible white-collar employees was the second time this decade that it has yanked its participation.

"I don't think anybody is happy about it, but people are pretty determined," says GM spokesman Tom Wilkinson.

Goodyear, which halted 401(k) matching in 2003, plans to resume starting Jan. 1.

"We're all excited it's coming back," says spokesman Scott Baughman.

More companies may end 401(k) match,
UT,
28.10.2008,
http://www.usatoday.com/money/perfi/retirement/2008-10-28-
pension-401k-match-ending_N.htm - broken linl

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