Posted on 01/10/2006 7:15:22 AM PST by SirLinksalot
Good Riddance to Traditional Pensions Print Mail
By James K. Glassman
IBM announced last week that it would freeze the old-style pension plans it provides to more than 100,000 employees and instead offer an improved version of its 401(k) plan. This is no run-of-the-mill accounting change or cut-costing measure. It is a major philosophical and economic shift for a bellwether corporation.
IIt means, in short, that International Business Machines is moving away from paternalism and giving workers more control over their own retirements. The U.S. government should do the same in reforming Social Security.
The IBM decision is good news as well for taxpayers, who ultimately could be left holding the bag if the Pension Benefit Guaranty Corp., a federal institution that insures pensions, can't meet the obligations of overextended companies.
Of course, IBM is in no danger of becoming the next Delphi. At last report, it had revenues of about $100 billion, after-tax profits of $8 billion and loads of cash. IBM's pension plan, with $48 billion in assets, is robust. But 40 years can pass between the time someone joins a company and the time he retires. Things change, as GM employees now know. It makes far more sense for workers to carry their retirement assets on their own backs, rather than counting on the company to ante up decades later.
There are two kinds of pensions. Defined benefit (DB) plans, or traditional pensions, involve a promise from a company to provide monthly checks to retirees at a specific rate, depending on how long they worked and at what salary. DBs are headed for the dustbin of history--and good riddance. There were 112,000 of them in 1985 and just 29,000 today.
Second is the defined contribution (DC) plan. Its paradigm is the 401(k), named for an IRS provision. A quarter-century ago, 401(k) plans began sprouting. Some 43 million U.S. workers now have them.
A 401(k) allows workers and employers to put pre-tax income into an account that's mainly composed of mutual funds (IBM offers more than 200 choices). Dividends, interest and capital gains pile up tax-deferred, and the account is owned by the worker. IBM's 401(k), with $26 billion in assets, is the nation's largest. IBM says that, starting Jan. 1, 2008, it will freeze the DB benefits of current workers and instead enhance the DC plan. New hires go straight to the DC.
Under the new 401(k), IBM will match, dollar for dollar, employee contributions of 6 percent of pay (the match is now 3 percent)--and, in some cases, up to four points more.
This is not altruism. IBM figures it will save about $500 million a year through the changes. Probably more important, however, the company gains certainty (the funding requirements of DBs fluctuate), and it provides workers with a stronger sense of responsibility and more confidence in a comfortable retirement.
Some disagree. Lee Conrad, a labor organizer, said after the IBM news: "Employees are going to be losing out on all kinds of benefits. You've got to wonder what's going to happen to the next generation of workers."
No, you don't. A study released last September by the Employee Benefit Research Institute and the Investment Company Institute found that Americans do a fine job with their 401(k) plans. Even with the rotten stock-market conditions of the early 2000s, the average account balances of 401(k) participants rose about 40 percent, to $91,000. And remember, these workers still have two decades to retirement.
Employees have, on average, two-thirds of their 401 (k) money in stocks--an appropriate share--and they are investing more in "life-cycle" funds, which shift to bonds as retirement nears. Loans from the plans are modest and declining.
More financial education wouldn't hurt, but DC plans are working exceptionally well, and complaints that people are too stupid to manage their own money are dead wrong. After all, a record 69 percent of Americans own their own homes--a far more difficult and risky purchase than the slow accumulation of mutual fund assets over 40 years.
IBM's decision offers a good model for reforming Social Security. Let new workers waive Social Security taxes and benefits and choose a 401(k); let current workers freeze their benefits and pay lower payroll taxes while boosting their 401(k) as a substitute. The U.S. government will have a sounder fiscal future when, like IBM, it stops treating adult American workers like children.
James K. Glassman is a resident fellow at AEI.
IBM's new plan does not seem particularly generous.
My company matches 5% in the 401K, and has a company-funded defined contribution plan that pays up to 14% for 'heritage' employees, and up to 7% for for new employees.
So I am collecting 5% in the 401K, and 10% in the defined-contribution plan. That's an automatic extra 15% going towards retirement.
It makes sense. Less may be promised, but a vested pension is always better than a company-run pension, because if the company goes bankrupt, you still get to keep it.
What, IBM will never go bankrupt? People might have said the same thing about a lot of other big companies that went bankrupt.
A bird in hand is worth two in the bush.
Dear proxy_user,
IBM's 6% isn't overly-generous, but it's pretty good.
If the employee is kicking in 6% (and remember - that's pre-tax), that's 12%. If you have 12% of your gross income going to a retirement account throughout your working life, and you invest cautiously and wisely, you'll retire comfortably. Even without Social Security.
sitetest
Thats a crock! I have invested 6% in my 401k for 20+ years without touching it. I am now half way to retirement and have less than the equivalent of two years salary in my account.
This is none other than negligent mismanagement of the employee funds and theft, plain and simple.
"Employees are going to be losing out on all kinds of benefits. You've got to wonder what's going to happen to the next generation of workers."
They get to look forward to; Medicaid, Medicare, Social Security after we turn all assets over to the state. Or I guess we can work right up to the grave if were able to.
The only ones who are leading the cheers are those who cannot see the beyond tomorrow and those who are doing the screwing in their own personal interest.
sorry /ranting
Now we just need to get all governments to do this. Arnold had this on the table last summer. I was hoping that another initiative would go on the ballot this year, but haven't seen anything.
This article is a little too rosy, IMO. He uses the average 401k balance, when I think it might make more sense to use the median, which I believe is much lower.
I don't think so. I'm taking the 15% of my salary that the company is kicking in, but I'm also putting 20% of my salary into the 401K. So 35% of my salary is being saved annually in tax-deferred accounts.
That doesn't count the after-tax savings, either.
LOL I will be working right up till my grave.
Everything is so expensive raising a family is very expensive.
Although I will be getting a Army pension as well as a company one, I cant see it keeping pace with the rise in living expenses.
As long as I am allowed to work I will even if it means pushing trolleys for the local super market when I am in my 70s
The problem is most people do not understand money. And if they don't understand money, how in the world will they know how to invest it?
My wife's company just changed the company that manages their 401k program. The mutual funds they are allowed to invest in now are all Morningstar three stars or less. I was smart enough to go to Morningstar and at least look at their past performance, the type of fund it is and so forth. How many people do that.
Defined pension programs have professional managers who are far better equipped to invest money and roll with the punches that the average smuck on the street.
There are a couple of problems with current plans. 1 is we are getting older so the old actuarial tables don't always work. 2. Companies have been able to use the plans as cash during the acquistion years. In addition, they were allowed to underfund the plans and that has caught up. 3. Companies don't want the liability of guaranteeing retirement benefits. They want to take that from a professional invenstor and give it to a guy or gal who can't balance a checkbook and has credit card debt out the wazoo.
Thank you, all these articles are crap, most of us have no intellectual illusions, we know the economy can and probably will tank just when we "retire", taking all our "savings" down the "fiscal" drain.
But, most of us also like to work, esp. if it's a job we like with good people.
So that paper profit represents how many month's salary? And the real jaw-breaker, two decades to go. What will be the effect of inflation on his $91,000? In the past 50 years starting salaries havc gone from 2,500 to $50,000 [20x]. When today's 401k savers retire the starting pay will be $1,000,000. How to people cope with government inflation is the real retirement problem.
You make some good points. With DC plans, the onus is on the individual to invest money wisely and in sufficient amounts. As you say, the majority of Americans are uneducated on investing correctly and that is a problem for DC plans to work correctly. People need to educate themselves on investing and acquire more of the ownership mentality. This is still a major move in the right direction as it forces people to manage their own money which has huge ramifications even politically because an investor capiatlist nation will vote largely republican.
Dear proxy_user,
Your company is quite generous at 15%. It's really great that your employer is so generous and that you can afford the additional 20%. If you have a long time until retirement, and keep it up, you'll be very comfortably off in retirement.
Some companies are that generous. Most aren't. A 6% match is a lot closer to typical than a 15% contribution.
And 12% is adequate, if one puts it aside faithfully each year from early in one's career until one is in one's mid-60s (standard retirement age), and doesn't dump it all either into speculative equities or low-yielding bond funds.
sitetest
This is none other than negligent mismanagement of the employee funds and theft, plain and simple.
Who managed your Plan? Most 401(k)'s are self - directed, within various mutual funds offered by the Plan Custodian. Call it professional curiosity...
All of this assumes 2 things:
Your stock portfoliio wil be worth as much in the market as it is on paper. When there are more sellers than buyers look for the market to tank.
You will need less money when you retire so it is better to pay taxes at a lower bracket.
If you evaluate them deeply these are both flawed assumptions and a lot of the boomers have a nasty surprise in store for them when they retire.
Geez, I stared at 29, and I've max out (or nearly so) each year and I have $250K.
You need better funds.
I'm not too sure about 'low-yielding bond funds'.
The reason the stock market has gone up on a historical basis is that the economy has been expanding as the population increases.
However, if the US and world population start to decline, bonds may pay better than stocks.
If you think for yourself, you're more likely to make money than if you do what everyone else is doing.
Yep, so much for the golden years. The day when welfare becomes more attractive than going to the office, factory or site, then where are we going to be?
Seems to me that many of the workers for these companies were promised a pension, and probably agreed to it in place of raises. Now they are getting screwed.
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