11/11/2011 9:00 PM ET|
Has your retirement been stolen?
If you're expecting a pension, it could end up being a lot smaller than you've been counting on. Plus: Some ways to check on your employer's pension plan.
If you're looking for a scary story to read, try "Retirement Heist." In it, Ellen Schultz, a Pulitzer Prize-winning reporter for The Wall Street Journal, describes how executives and accountants legally looted pension plans of billions of dollars. (See "Who killed private pensions?" for more from her book.)
To be sure, the Employee Retirement Income Safety Act of 1974 made clear that pension assets are to be managed solely for the benefit of participants. But Schultz describes how companies still managed to use the money to pay for severance packages and parachute payments to executives, among other things. Some companies simply sold pension assets for cash. Now pensions are collectively 20% underfunded.
Many employees are already aware of how this pension-starving affects them. In the book, Schultz writes about a Delta pilot who'd been receiving a pension of almost $2,000 a month, which fell to just $95 a month after the company went bankrupt. But others have yet to discover what's been going on behind the scenes. If you have a pension and have been planning to rely on it in retirement, listen closely to what she has to say.
Forbes: First, what are some companies that have cut employees' pensions and benefits?
Schultz: The companies I looked at included IBM, Verizon, AT&T, and I could keep going. Cooper Tire. General Motors. It's safe to say that most of the companies in the S&P 500 have done some version of this.
Forbes: And what did they do?
Schultz: Companies began cutting benefits because doing that enabled them to keep the money themselves, and it also boosted their earnings. Cutting harmed employees and retirees, but it boosted the pay and pensions of top executives.
During the '90s when accounting rules changed, this coincided with the trend toward awarding executives' pay that was based on performance. Let's say you reduce pensions by $100 million, that's essentially $100 million that gets added to profit. It's paper profit, but it affects earnings the same way as earnings you get from selling trucks. So executives were rewarded.
Forbes: Don't pension payments for thousands of workers dwarf the amount paid to executives?
Schultz: Not necessarily. Look at Massey Energy (Editors note: now part of Alpha Natural Resources). Last year, they had a huge Big Branch mining disaster. Dozens of miners were killed. The CEO was pushed out. He was given a retirement package that was worth $55 million. And the total payout for the coal miners, for black lung, traumatic workers' compensation (which means severe injury) and pensions and health care, that all came to $37 million, and that's for thousands of people. True, their costs will be ongoing, but it does put the magnitude into perspective.
Forbes: So what do employees do now?
Schultz: In many cases, the damage has been done. If they had a pension, it's already been cut or, in more extreme cases frozen, like at IBM. People who really have to worry are those at a company that's headed toward bankruptcy. That company is probably not contributing to the pension plan and is diverting assets elsewhere. If the plan is very underfunded, then they can lose some of their benefits. People most likely to lose the most are midlevel to upper level managers, I'm not talking about the executive ranks. People close to retirement who have already built up a pretty good pension, they might not get all of it. Your readers would probably be in this particular cohort.
The maximum amount paid out by the PBGC -- the Pension Benefit Guaranty Corp., a federal insurer that takes over failed pensions -- is $54,000 a year in 2011. But the amount can be reduced significantly if the plan is underfunded and because of quirks in the rules. If a person is expecting a pension of $4,000 a month or so, he should keep his eye on the company and make sure the plan's funded.
Forbes: How do people do that?
Schultz: They get an annual disclosure document, though this is often a year out of date.
Forbes: What about people at small and midsized companies, are they in the clear?
Schultz: Oh, they have to worry. Especially when you get down to smaller companies, there's more temptation at that level for the plan to be managed more as a tax shelter. You obviously want to make sure the plan has filed the correct documents with the IRS, and you want to make sure it's being funded adequately. The only surefire way is to look at something called a 5500 form. The downside is you can only get it when it's a year and a half out of date. Your company might be starving the pension, and you won't know until it's a bit late in the game. You can get these online at a website called FreeERISA.com (registration required). Look up your company's 5500, which will show the assets and the liabilities.
You can also get an idea of how much pension the company owes by looking at the 10(k), the SEC filings available at sec.gov. They'll mention the pension obligations and how much money is in the plan. But it's important to understand that they might look underfunded when in fact they're well-funded, because the figures usually include executive benefits, which aren't funded.
Forbes: What about government employees, or teachers, cops and firemen?
Schultz: There's been a bit of hysteria over the public plans. For the most part, the benefits aren't as rich as they've been characterized. Most are fairly realistic, and the numbers sometimes look larger than they really are because they include automatic forced retirement savings, for example. The bottom line is that, with some well-publicized exceptions, a lot of these plans aren't as generous people think they are and aren't as underfunded as people think they are.
It's unlikely that public employees will be forced to forfeit what they've earned, so if a person's earned $2,000 a month in retirement, that's probably not going to be taken away. But they may see their benefits reduced going forward. There will also be a big push to curtail retiree health benefits, so both public and private employees need to be saving extra for that. There are a lot of things you can't count on anymore.
Forbes: If someone has a question about their pension, who can they call?
Schultz: The Pension Rights Center in Washington can refer people to a lot of resources. There really aren't too many others that a person could go to. If they're in a union, their union really ought to be on the ball and be able to tell them how healthy their plan is and explain the benefits. There are also some nascent groups including the National Retiree Legislative Network, a fairly new group of people who are mostly retired salaried managers and employees who banded together to compare notes, share concerns and lobby their congressmen to tighten some of these rules and protect them better.
Forbes: If your pension has been cut and you don't have enough money to retire, what can you do?
Schultz: Well, you'll probably have to continue working longer. You'll have to save more, which will be difficult. Contrary to popular perception, salaries tend to not rise after the 40s, when adjusted for inflation. It's difficult, especially if you end up losing your job. You could be in quite a tight spot. What I have seen in a lot of these cases is that people end up selling their homes. Really, the only safety blanket that you have is Social Security, which is also under assault. The same retirement industry that dismantled pensions would love to dismantle that program and have a crack at the assets.
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