Company 401k Plans: "The burden has shifted"

» AL_W - "The burden has shifted"

Found in Sunday's SJ Mercury News: http://www.miami.com/mld/miamiherald/bus...

Posted on Sun, Jan. 22, 2006

The burden has shifted

EMPLOYERS DROP GUARANTEED PENSION PLANS FOR 401(K)S, LEAVING WORKERS RESPONSIBLE FOR THEIR OWN RETIREMENT

By Laura Smitherman and Meredith CohnBaltimore Sun

As companies continue to drop pensions that have afforded generations of workers a comfortable retirement, a chorus of financial experts warns that workers must learn to save for themselves.

But like admonitions to exercise more and eat less, many workers aren't heeding the advice. One recent survey revealed that one-fifth of Americans think their best shot at amassing savings of several hundred thousand dollars is to win the lottery. And that's far short of the $1 million that some financial planners say baby boomers will need for a nest egg.

T. Rowe Price crunched the numbers with a computer simulation that's able to account for thousands of possible market scenarios. The conclusion: Individuals should save at least 15 percent of pretax salary in order for those investments to bring half of that salary in retirement.

The announcement earlier this month that IBM plans to freeze pension benefits and put workers into a 401(k) plan was seen by many retirement experts as pivotal in the shift away from corporate pensions. Those benefit plans first became popular after gaining tax exemptions in the early part of the 20th century and defined retirement security for the postwar generations.

Over the last quarter-century, the percentage of private-sector workers who rely on defined-benefit plans or pensions has shrunk to 6 percent, while the percentage of workers in defined-contribution plans such as the 401(k) more than quadrupled to nearly 30 percent.

The shift puts more responsibility on workers' shoulders, exacerbating concerns that Americans in general don't save enough and aren't savvy enough to navigate the financial markets on their own. And companies, some of which shed pension plans because they could no longer afford them, have come under pressure to ensure that employees become better stewards of their own retirement.

But even corporate executives aren't so sure their efforts are paying off. A survey of more than 220 U.S. companies released earlier this month by Hewitt Associates, the human resources company based in Lincolnshire, Ill., found that only 6 percent of companies are confident their employees will take responsibility for their retirement future, down from 12 percent a year earlier.

Many companies have responded by making their 401(k) plans practically automated. Namely, they are adding features to thwart bad financial moves, including automatically enrolling employees to get them started saving as early as possible, automatically increasing their contribution amounts, and automatically rebalancing the accounts toward the less volatile bond market as employees grow older.

Experts say IBM may be a bellwether for other companies to design retirement plans that lead to fatter savings. Among the features built into IBM's new plan is automatic enrollment, whereby at least 1 percent of each paycheck is directed into an account. The plan also offers an annuity option, which would help retirees manage their retirement by providing an investment vehicle that pays out until death.

``I am an extraordinary fan of defined-benefit plans, but the world has in fact dramatically changed,'' said Dallas Salisbury of the Employee Benefit Research Institute. ``If the offset is that companies start aggressively encouraging people to save and provide financial literacy education, that may be a very positive silver lining.''

Many IBM workers will be better off under the relatively generous 401(k) that includes a dollar-for-dollar company match of up to 6 percent of pay that's diverted into the plan, Salisbury said. He added, however, that older workers might have a difficult time making up lost pension benefits with the new plan.

[EC] My company, Owens Corning, shifted to a 'cash balance' plan 6 years ago, to which they contributed 4% a year with a catch-up feature for older employees. Each person's fund collects market rate interest.

Addtionally, we have a 401K with one-for-one cash matching up to 5%.

The old 'defined benefit' was not cancelled for current employees, but frozen at the 2000 wage level. We get to choose which plan has more value. My analysis says the two values cross about age 64. The old plan's lump sum value jumped 100% when I turned 55 last year. [end of EC]

Workers who already accrued benefits under the IBM pension won't lose them, but they will no longer accrue benefits after next year. IBM had already closed its pension plan to new employees at the end of 2004.

While IBM is considered healthy, many companies that have dumped retiree benefits were in financial straits. United Airlines parent UAL, which is in bankruptcy, is one of several airlines that have dropped pension plans, and Bethlehem Steel ended retiree health benefits before it was sold. Other companies that have closed or frozen pensions are Lockheed Martin, Verizon Communications, Hewlett-Packard and Motorola.

Meanwhile, many experts warn that a pension crisis is looming because companies haven't set aside enough money to cover future payments to retirees. According to the Pension Benefit Guaranty Corp., the federal agency that insures pension benefits, pensions are under-funded by about $450 billion.

The prospect that a pension plan -- or a company -- could become insolvent makes 401(k) plans more attractive, said Conrad Ciccotello, director of graduate financial planning programs at the Georgia State University's Robinson College of Business.

The problem with the 401(k) is that people don't contribute enough. According to Federal Reserve data, U.S. households led by people between the ages of 55 and 64 have a median of $55,000 in retirement accounts, including 401(k)s. For those who are 65 and older, about 20 percent of them count Social Security as their only income, according to the Social Security Administration.

-- posted by AL_W