The Rush to Shut Down Pensions ( More Companies Likely to Follow IBM )

Business Week ^ | 01/09/2006 | Nanette Byrnes

[SirLinksalot]

The Rush to Shut Down Pensions

When a well-funded giant like IBM joins the move to end defined-benefit plans in favor of 401(k)s, even more companies are likely follow

What a difference a year makes. Back in December, 2004, when IBM (IBM ) announced its intention to close its traditional pension plan to new employees, offering them the 401(k) plan instead, the company made it clear it did not wish to become a poster child for the broader demise of these old-fashioned retirement plans. Pensions already had been a painful public-relations black eye for Big Blue, which had been battling employees for years over changes made to the pension in the 1990s. More bad press was not what anyone wanted.

But on Jan. 5, IBM thrust itself back into the headlines with its decision to go one step beyond its earlier move and "hard close" those old plans. That means not only new IBMers, but people who have been there for decades, would no longer be accruing guaranteed benefits. Instead, they would be part of a more generous 401(k), though any pension dollars already earned would still be theirs as well.

Coming on the heels of a similar move by telecom giant Verizon (VZ ), it seems to be one more tolling of the bell for the promised pensions of old.

[Muzzle_em]

What is the difference between a pension plan and a 401K?
I've always had a 401K with employer matching.

[Maneesh]

Pension is defined benefit : you get a percent of your salary every year after you retire. You have to have worked a minimum amt of years to vest and the company manages your money.

401 K is defined contribution. You put some money and your employer matches it and it stays in a tax deferred status in mutual funds or stocks and you can control where it goes. When you retire the company has no further liability regarding you as the money is in an account with your name on it.

[nyconse]

We depended on these plans because they were promised to us...this was one of the reasons we took the job to begin with. Sorry, the company made a promise and should not be allowed to walk away from their obligations. If they choose to change their plan now...fine, but for those who are vested the original terms must be honored.

[Maneesh]

The PBGC (Pension benefit guaranty corporation) may step in but even then you will get a percent of what you were promised. Essentially in a pension plan you have no control over whether you get your money or not.

[sinkspur]

I think IBM or GM should be forced to cut CEO salaries to the bone and be granted a temporatry reprieve from some of their obligations, but no they should eventually have to pay their employees promised pensions. They gave their word and people depended on this. Any company that wants to do this need to go into chapter 11 for restructuring and all current CEO's need to be fired (no sweet deals either).

You're not in business, are you?

Intervention by the government in business processes (like "forcing" companies to do things) is precisely the reason IBM can't afford pensions any longer.

Besides, no millionaire retired on a pension. You're much better off in a self-directed 401K.

[Jim Verdolini]

"We have been brainwashed into believing that you should expect to make less money after working 45 years because you will need less money at 66 than you do at 65. Where did that lie come from ?"

That is simple....one was expected to have bought his house, put his kids through school and be living a family of two with vastly lower bills. The problem is, the Boomer generation was simply too greedy.

I unsuccessfully sold insurance products for a while. I was astounded by two ideas prevalent in Maine. The first was simple.. the family of modest means and vastly overweight couples believing the wife will remarry if the husband dies, so insurance is not needed.......

I did not say the folk in Maine are all that bright.

The second was typified by a retirement planning session I did with two professionals in Portland. One was an architect and the other a nurse practitioner. Their combined incomes was about $125K. They were in their mid 50's. They had 3 kids within a very few years of going to college. They desired to retire within 3 years and expected an income of about half their current salary.

Their problems....They had just bought a $500K home with a $480K mortgage. Their kids all thought they were going to Ivy league private universities. They had under $10K in the bank and had no retirement plans of any sort.

When I told them then needed to salt away more than their annual income for the next 5 years to even approach their retirement goals and that it would be almost impossible even if they waited till social security unless they saved a vast segment of their incomes....well, let us say they were not at all happy.

What was worse, they did not even make the sort of modest retirement savings they could afford. Nope, next years vacation and car change trumped all.

I, as a starving insurance type, was far better prepared for retirement than they were.

[nyconse]

We shall see...there are millions of potential voters who are not going to be happy about being screwed out of their retirements. Politicians may have to step in and do something. However, the companies would be better off to address this issue in a responsible way rather than let Congress get involved.

[joesbucks]

Now, can this decision be blamed on the unions?

[Fawn]

Government at all levels....

And I hope it stays that way since I suffered through many aggravating years with the state at a low pay JUST BECAUSE of the pension plan.

[sinkspur]

We always talk about "accountability this, and accountability that," but when push comes to shove, how will these corporations be held accountable for any of there wrongdoings?

A company is under no obligation to provide a pension, and there is no "wrongdoing" for restructuring retirement offerings.

I worked for IBM for 18 years, and I've got a pittance coming from them when I turn 65. But, even when I worked for them, their 401K offering was far superior to the defined benefit option.

[Maneesh]

Attaboy: Great post, I endorse your thoughts completely. Too much intervention by the govt like the stupid anti-trust regulations is what caused this problem to a large extent in the first place. Reduce goct regulations, let free enterprise thrive and more profitable companies are more likely to pay pensions for longer times.

[nyconse]

I stand by my statement- don't promise what you can not deliver and then expect to walk away from it when times are tough. It is not ethical, and it is unfair.

[nyconse]

If they promised a pension, then yes they are obligated to provide a pension-in my opinion legally obligated.

[nyconse]

If they promised a pension, then yes they are obligated to provide a pension-in my opinion legally obligated.

[Maneesh]

Wow, those are interesting and scary stories. A lot of boomers keep living in the present and are woefully ill prepared for retirement. I am sure you have met a lot more of these types. A lot of these folks know that the US govt will bail then out in the end; the welfare entitlement mentality is very weel established. As an Insurance pro can you verify this statistic for me. At age 65, 95% of all Americans are dead or dead broke, 4% are independent and 1% are wealthy. Is that true ?

[dyed_in_the_wool]

Does any realize what is going to happen when a large chunk of the boomer's start retiring and pulling money out of the markets?

You mean like started happening in 2000 when the first boomers were eligible for early retirement? I hate to break your bubble, but you're 8 years late with this news. Look at prices after first quarter of retirement eligible started cashing out in 2000 and you'll see one heck of a price drop.
No reason to be shocked. Signs were there all along.

[sinkspur]

I stand by my statement- don't promise what you can not deliver and then expect to walk away from it when times are tough. It is not ethical, and it is unfair.

Only the naive rely on a company to provide their retirement.

Since pensions are optional, companies are free to change the terms of service and participation at any time.

That's why YOU need to take charge of YOUR savings and retirement.

401Ks are great, as are Keogh plans for the self-employed. You put in as much as you can (up to a yearly maximum), and decide where to invest it.

Why wouldn't you do this rather than let IBM pay you the pathetic equivalent of 2% ROI?

[redgolum]

I stand by my statement- don't promise what you can not deliver and then expect to walk away from it when times are tough. It is not ethical, and it is unfair.

Don't disagree with you. But the problem is the companies can not financially meet the pension obligations and remain solvent. So, something has got to give. Often that is those who are expecting to receive pensions.

My grandfather's generation went through this in the 30's. His plan was, and remained so till the day he died, to make sure you could take care of yourself. I suspect that before this all sorts itself out, we will have to go through a crash like the great depression.

[Eva]

I have been thinking that these companies are ending pensions for several reasons, not the least of which is the burden of the baby boomer retiring and living well beyond the life expectancy on their parents. These companies are waking up realizing that they can't take total responsibility for their employees for the rest of their lives. You mentioned how many people took the lump sum cash, well then you shouldn't be surprised at how many people don't bother with the 401k when they also expect a pension.

[Semi Civil Servant]

And for the catastrophic cases that you describe people can buy a high deductible low premium policy so where is the problem ?

I have a friend who retired early. He has extremely high cholesterol that doesn't respond well to medication. He's been looking for a health policy that will cover his situation. All he's been able to find are policies that specifically exclude his "pre-existing" condition and conditions that may arise from his high cholesterol (pretty much all cardiology problems).

Could you provide me with links to some of those "high deductible low premium policies" you speak of that doesn't exclude his condition so I can pass this information on to my friend. Thanks.