Posted on 06/22/2006 10:26:20 PM PDT by 11th_VA
Tired of reading about America's retirement woes? Then I have an alternative for you: Watch a TV show about them. Heck, you don't even have to move to your TV -- you can watch it on your computer, from the comfort of your own desk chair. The particular program I'm talking about is an episode of the PBS series Frontline titled "Can You Afford to Retire?"
Of course, since you've clicked on this article, you can't be too tired of reading about all of the impending retirement woes out there, so let me sum up the program's main points and then explain how you can be an extraordinary American by actually being able to retire.
Goodbye, pensions ... unless you're the CEO We all know that thousands of pensions are underfunded. We've heard the tales of people who dedicated their lives to a company, only to see it slip into bankruptcy and take all of its retiree benefits with it. The Frontline program rightly started off by discussing the demise of the traditional pension -- it focused on current and former employees of United Airlines (Nasdaq: UAUA), which filed for Chapter 11 bankruptcy protection in 2002 and dumped its pension plans on the Pension Benefit Guaranty Corporation. When the government-sponsored PBGC takes over your plan, you'll still receive pension benefits, but only a fraction of what you would have received if your company had stayed in business. (The PBGC itself, by the way, is $23 billion underfunded.)
But the real shocker in the Frontline program was the revelation of how such bankruptcies are becoming an acceptable way for companies to get out of their pension obligations. Listen to what United's lead bankruptcy lawyer, James H.A. Sprayregen, told Frontline: "I would say that Chapter 11 has become somewhat of a more accepted strategic tool than just companies filing who are about to go out of business or something like that. As a result, there's more use of Chapter 11 now than probably 20 years ago."
So should you be worried if your pension is underfunded? Well, according to a recent report from Standard & Poor's, corporate America doesn't seem to be taking pension funding too seriously. From the 2005 "Pensions & Other Post Employment Benefits Report": "While corporate operating earnings post 16 consecutive quarters of double-digit growth, corporate pension plans remain in the red with minimal contributions continuing to be made. ... S&P 500 defined-benefit plans as a group were $140.4 billion underfunded for 2005."
According to the report, here are the 10 companies with the biggest deficits:
1. Exxon (NYSE: XOM)
2. Ford (NYSE: F)
3. Lockheed Martin (NYSE: LM)
4. General Motors (NYSE: GM)
5. Raytheon (Nasdaq: RTN)
6. Pfizer (NYSE: PFE)
7. DuPont (NYSE: DD)
8. Goodyear (NYSE: GT)
9. Procter & Gamble (NYSE: PG)
10. IBM (NYSE: IBM)
It should be noted that bankruptcy might be the only way for some companies to survive, and sometimes employees have to give up something just to keep their jobs. United was certainly in dire straits. But I suspect that it's harder for the folks in the rank-and-file to accept their reduced pension benefits when, according to Frontline, executives were given $400 million in stock grants and CEO Glenn Tilton's $4.5 million was put in a special trust so that he'll still get his full benefit. Very nice.
Hello, 401(k)s ... unless you don't participate Next, Frontline discussed the shift from defined-benefit plans to defined-contribution plans -- i.e., the shift from companies being responsible for funding retirement to the employees having to do it themselves. Unfortunately, employees don't seem to be doing a good job of taking the reins. After all, they have to answer several important questions:
"Should I participate?" The answer, of course, is "yes!" But since 30% choose not to, some folks are making different choices. And we're not even talking about the 50% of workers who don't have access to an employer-sponsored plan.
"How much should I save?" The best answer is "as much as you're allowed," but, says Alicia Munnell of the Boston College Center for Retirement Research, fewer than 10% of participants contribute the maximum.
"How should I invest it?" The move to defined-contribution plans requires that every employee becomes his or her own money manager. We at The Motley Fool believe you can do it, but clearly, as we'll see later, many people aren't up to the task.
"How should I take the money out?" Frontline profiled a fellow who cashed out his entire 401(k) when he retired, resulting in a huge tax bill. Ouch. The better move: Transfer the money to an IRA, and take money out only when you need it, leaving the rest to grow tax-deferred. One of the most interesting tidbits from the Frontline episode came from benefits consultant Brooks Hamilton, who oversees 15 large 401(k) plans. At one point, he calculated the investment return for each participant in each of the plans. And, in his words, here is what he found:
"Say the bottom 20% had an investment return for the year of 4%. The top 20% would be anywhere between five and seven times that number. ... In every case, the 20% at the top not only had the highest investment income, they also had the highest average annual pay. Whereas the bottom 20% not only had the lowest investment income, they had the lowest average annual pay."
Frontline characterized the situation this way: "The richest people are getting richer, and the middle-class workers are falling further behind." This is certainly the case, but not in the same way as Glenn Tilton getting to keep his pension while everyone else's is reduced; the 401(k) system isn't rigged. We do have to recognize, however, that the average American isn't prepared to be an investment expert. Most schools don't teach personal finance, and neither do most parents. And clearly, most Americans aren't doing enough to teach themselves.
Now, we at The Motley Fool -- being the do-it-yourself, control-your-own-destiny types that we are -- are big fans of self-directed retirement accounts. And believe me, traditional pensions aren't the answer. They benefit people who stay with the same employer for decades, not the typical job-hopping American. My wife and I worked a combined 10 years at the same elementary school, and from those jobs we'll receive a combined $108 a month in retirement -- not adjusted for inflation. I would have gladly taken the 6% of my salary that the school contributed to the pension fund in the form of matched contributions to our 403(b) plans.
But the reality is, as retirement becomes the sole responsibility of the individual, many people -- because of bad decisions, bad health, bad education, or bad luck -- will have to work forever.
It's all up to you Frontline interviewed Notre Dame economics professor Teresa Ghilarducci, who said, "What is the meaning of retirement if the only way you can live is to work? The answer is, there is no meaning to retirement anymore. We are now shifting from lifetime pensions to lifetime work. It's the end of retirement."
For millions of Americans, Ghilarducci is absolutely right. But it doesn't have to be that way for you. You don't have to be among the people who don't save enough, and who don't invest wisely, who don't make smart decisions about 401(k) withdrawals. If you need to learn the basics, read about the easiest retirement plan ever. For more detailed information, give our Rule Your Retirement service a 30-day free trial. You'll get access to all of our past issues and special reports, as well as our online financial-planning tool and professionally staffed discussion boards.
But whatever you do, do something. The choice between working and retiring is entirely up to you.
Robert Brokamp will rule his retirement by not paying $800 a year for basic cable. And with shows like Frontline, who needs cable? Robert doesn't own shares of any companies mentioned in this article. Pfizer is a Motley Fool Inside Value recommendation. The Motley Fool has a disclosure policy.
It's obscene that major corporations can set up a pension fund and not fully fund it. The fund should be a "pay as you go" thing, with a diversified investment portfolio and people overseeing it should be members of the pension.
The Exxon chairman just pulled down the biggest paycheck in history. How the h*ll can he do that when the pension isn't funded? Guess who's going to get to bail all these companies out?
How does Exxon have any pension debt whatsoever? Don't tell me, let me guess. They will dump the pensions so the taxpayers can cover them, right? And then post another $10 billion dollar profit.
Timely report.
I was planning to move intoRaytheon third quarter of this year, but if they are sopoorly managed as to make this top ten list, I'll invest elsewhere.
Thanks for the tip.
They have pension deficit disorder.
"Goodbye, pensions ... unless you're the CEO."
I just want to know how CEOs at these companies cannot be held personally liable somehow for fraudulently contracting with labor, by saying that their pensions are valid, when a CEO knows damn well the pensions are worthless paper.
Top management mismanages and generally screws up a company to the point of bankruptcy, and then skips out with a huge multi-million $ bonus package. The employees who were promised a pension get the shaft while he gets millions for screwing them out of it.
LOL!!! - You win "Post of the Day" !!!
I'm watching the Frontline show over the internet right now - They're talking about the United debacle - this is awful. The banks were first in line and got all their money back plus interest an FEES - one law firm made 100 million in fees alone ...
Actually I think the demise of defined-benefit retirement plans is one of the few significant roll-backs of socialism in the U.S. in my lifetime. It's unfortunate that some hard-working retirees will get screwed, but in long run it's much for our society. When people get the notion upon first entering the work world that somebody else will take responsibility for their long-term financial security, that's a huge step down towards sheephood.
I think the PBGC will do decent bailouts of the companies that actually need it. But for financially healthy companies like Exxon, Pfizer, and P&G, "underfunding" is just a regulatory classification, and in no way implies that retirees actually won't get their checks. When push comes to shove, the PBGC will push a company into bankruptcy/liquidation before bailing out its pension fund. Believe me, if they started liquidating Exxon's assets right now, there would be plenty to pay all the contractual retirement obligations. The shareholders would get screwed, but a big part of the purpose of these "underfunded" classifications is to give shareholders an early warning system; if the problem is really serious, shareholders will start bailing, share price will plummet, and executives' big share-price-tied bonuses will shrivel up like raisins, triggering a financial clean-up. One of the most important financial clean-ups is to stop offering a defined benefit retirement plan to new employees, to start phasing it out.
the rest of us are just fodder...
only good thing is because we private employees will have no money all those teachers and federal workers etc will be footing more and more of the tax burden.....
I think they do it on purpose just to throw the pensions out....
research Charles Hurwitz and how he dragged Kaiser Aluminum down the tubes then sent all the pensions and medical benefits down with it.....
I think it's going to be a black Friday.
Now, I understand why firms like Ford and GM (Great Mismanagement?) are there. It is quite obvious really. And I'll go ahead and ignore most of the other firms listed. My question then is as follows: Why in blazes is Exxon on that list?
Aren't they pulling in more profit than barn cats nab mice? What gives? Seriously.
And there ends my stupid question of the day.
>The answer is, there is no meaning to retirement anymore. We are now shifting from lifetime pensions to lifetime work. It's the end of retirement.<
"Retirement" in fact is an anomalous state. Over most of American history, Americans haven't 'retired' because they couldn't. There was a generation or two that did retire when pensions still existed, but that's gone for most of the people 'retiring' now.
It's going to get interesting. A lot of people are depending on the value of their houses to feed them, and some even have illusions of living decently. Won't happen for many of us; between the present housing price decline, as the boomers try to cash in in ever-increasing numbers there just are not the warm bodies around to buy those houses, and the people who have money--the one's whose earnings have not been completely degraded by the influx of illegals slashing the price of labor--will be relatively few, but they will own McMansions at deeply discounted prices.
But wait! It gets worse. People who want to keep working just because they want to find out soon enough that American business doesn't want them after 45 or so--they're throwaways. Increasingly, as people must work for life, watch for highly skilled, highly trained, highly competent and motivated people in fields that do not lend themselves to consultancies or small business to work for very small dollars indeed, IF they can convince someone to hire them to do anything at all. [& I expect smug souls who imagine themselves immune to such surprises to crow about how this would NEVER befall them, but never say never. We all have targets on our economic backs in some fashion. You don't have to be lazy, stupid, unambitious or short-sighted to find your life seriously derailed in short order. This happens daily to a lot of people who have played by the rules and who in fact worked hard and lived prudently, people who never anticipated being kicked to the side.]
Who benefits? The people at the top of the food chain, the very apex--for a while. When Americans have largely been reduced to peasantry, they won't be able to buy the products, and the whole system goes into a serious meltdown.
It's all really too bad, because it is driven by short-sighted greed. If manufacturing had not been sent overseas, things could have continued as they were, but very shortly, we're about to discover that we cannot make nearly the same incomes flipping burgers for each other. The 'service' economy goes belly up when people cannot afford to pay for those services. When it all melts down, the corporate slugs with the big paychecks and bonuses will find that their take isn't worth what they thought, either, as the value of the dollar inevitably crashes and burns, but they probably won't be left living on ramen noodles, cat food (or cats), and going without medical or dental care.
One thing about 401(k) plans is that they can't take it away from you. With a pension when you die it's gone, unless you accept lower payments so you'r spouse can continue to collect something when you're dead. A 401(k) is part of your estate and passes on to your survivors.
One thing I would like to see changed in 401(k)s concerns matching funds. A lot of companies match 401(k) contributions with company stock, and a lot won't let you convert that stock into other investment options. Over time you have an excessive percentage of your savings in a single company, and if that stock tanks then a good percentage of your savings tank with it. I'd like to see a regulation allowing you to convert matching stock to some more diversified investment.
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