Category Archives: defined-benefit plans

More Bad News on 401(k) Front

Seems the 401(k) red flags just keep waving. This latest report from Ben Steverman on the Bloomberg.com site — based on U.S. Census Bureau research — shows a whopping two-thirds of Americans aren’t putting money into any defined-contribution plans.

That’s right. Based on this research, which relies on tax data instead of surveys (as in the past), only about a third of workers are saving in a 401(k) or similar tax-deferred retirement plan.

What’s more, it now appears — using this new research methodology — that only about 14 percent of employers offer retirement plans at all! How can that be? As the report explains:

“Census researchers Michael Gideon and Joshua Mitchell analyzed W-2 tax records from 2012 to identify 6.2 million unique employers and 155 million individual workers, who held 219 million distinct jobs. This data produced estimates starkly different from previous surveys.

“For example, previous estimates suggested more than 40 percent of private-sector employers sponsored a retirement plan. Tax records uncovered a much bigger pool of small businesses, showing that, overall, just 14 percent of all employers offer a 401(k) or other defined-contribution plan to their workers.”

Bigger companies, the researchers say, are the most likely to offer 401(k) plans, and since they employ more people than small firms, they skew the overall number of U.S. workers who have the option. Gideon and Mitchell estimate that 79 percent of Americans work at organizations that sponsor a 401(k)-style plan. In the words of the report:

“The good news is that’s more than 20 points higher than previous estimates. The bad news is that just 41 percent of workers at those employers are making contributions to such a plan — more than 20 points lower than previous estimates.”

But should we all be trying to shepherd employees into 401(k)s? Earlier posts by me on this site suggest that’s a very good question. This one from January finds the creators and supporters of the retirement-savings vehicle now lamenting their creation. None of them imagined the vehicle would replace pensions, leaving workers struggling to ever contribute enough to their 401(k)s to retire comfortably.

As Herbert Whitehouse, a former human resource executive for Johnson & Johnson and one of the earliest proponents of the 401(k) for employees, tells the WSJ in that post, he and others were hoping and assuming back in 1981 — when the 401(k) was in its infancy — that the savings approach would be a kind of supplement to company pensions.

They did not imagine the idea would actually replace pensions as employers looked to cut costs and survive during subsequent downturns. As Whitehouse puts it in the WSJ story:

“We weren’t social visionaries.”

Then there’s this post a little later in January presenting the opinion of benefits expert Larry Sher, who thinks there’s even more corrupt and wrong with the savings vehicle than its merely replacing pensions. He blames the people who’ve had skin in the 401(k) game all along, who’ve been reluctant to give up their own benefits of the system — a system that forces employees to shoulder more responsibility and stress.

The chief concern of policymakers, employees and even some of the employers that have embraced the 401(k) concept, Sher says, “can be summed up as the total shifting of risks to employees — the risks that they won’t save enough, the risk that they will use the savings for non-retirement purposes, the risk of unfavorable investment results — culminating in inadequate retirement savings and the prospect of outliving such savings.”

Meanwhile, some states and cities have introduced local individual retirement accounts designed to encourage workers to save by requiring employers to either offer a retirement plan or automatically enroll their workers in the state- or city-sponsored IRAs.

The U.S. House of Representatives, however, voted to rescind those rules on Feb. 15, citing the IRA plans’ unfair competition to the financial industry. If the GOP-controlled Senate and President Donald Trump sign off on the move, all such auto-IRA plans would be placed in jeopardy, leaving people in the lurch once again. As Steverman writes:

“Whatever the outcome, any effort to get workers to save for retirement faces a daunting challenge: Can Americans spare the money? Student debt and auto loans are at record levels, according to Federal Reserve data released Feb. 16, and overall consumer debt is rising at the fastest pace in three years.

“Retirement is an important goal, but many Americans seem to have more pressing financial concerns.”

More Confirmation of a Benefits-Bottom Line Connection

Came across this recent news piece from Prudential (courtesy of WorldatWork) that confirms what we’ve been hearing: Senior managers, boards of directors and finance/treasury professionals are all getting much more involved in their companies’ benefits decisions.

The Prudential study finds 40 percent of plan sponsors say the employee-benefit decision-making process in their company has changed over the past five years, demonstrating increased attention to the bottom-line impact of benefits.

The study, which surveyed plan sponsors, plan participants and broker/consultants, finds the influence of senior management has increased the most (45 percent say they’re more involved). More than 20 percent of plan sponsors also say boards, finance/treasury and employees themselves are all playing more important roles in deciding what benefits are offered and how much money should be allocated to them.

The most dramatic perception of change came from benefits brokers and consultants, with more than two-thirds of those surveyed (69 percent) seeing changes in the areas and seniority of people involved in the benefits decision-making process.

This certainly underscores Dave Shadovitz’s Leader Board post yesterday from this week’s IBI/NBCH Health and Productivity Conference at the Fairmont San Francisco. Findings from a study presented there — looking at chief financial officers’ perspectives on the role health plays on financial performance — shows most CFOs now consider health an organizational imperative.

Inerestingly, both studies also indicate this interest by top leaders in their organizational health goes beyond finances alone. In the study of CFOs, their newfound interest isn’t confined to healthcare costs, but extends into the cultural and overall performance impact — including sick days, absences, turnover and opportunities lost.

Likewise, the Prudential study looks at the growing importance this new focus has on employees’ overall satisfaction with their benefits; which, of course, enhances overall performance.

“Our research suggests that greater involvement throughout the employer organization may enhance the decision-making process and lead to more relevant benefits offerings,” says John DeLorenzo, senior vice president of sales and account management for Prudential Group Insurance. “Companies that are more focused on benefits tend to pay more attention to communications, which in turn leads to higher levels of employee satisfaction.”

 

Switching from a Defined-Benefit to Defined-Contribution Plan

Siemens Corp. swapped a future $5 billion pension liability for a $259 million one-time P&L impact when it froze its pension plan and offered employees increased company-matching contributions as well as a new service-based company contribution to the 401(k) plan — the combination of which equaled the company’s contribution under the pension plan.

It didn’t reduce the company’s current-day costs — in fact, it cost more money, said Steven Seltz, vice president of compensation and benefits for US/Americas for Siemens Corp. — but it did eliminate potential liability down the road.

And it was a long road to see the plan from conception to fruition — take two years to conceive and get approvals and another year to communicate and implement the change, Seltz said.

“There was no way we could overcommunicate” the changes, he said, noting that employees received at least six written brochures, notifications or requests for action during the transition. Siemens also offered in-person and web financial-planning seminars and offered financial counseling.

They “anticipated the worst” from workers and were surprised that there was “virtually no criticism whatsoever” from employees, both union and non-union — crediting not just the equitable plan but also the communications effort that was part of the transition.

Key takeaways from the process, said Seltz and Nicholas Vollrath, manager of retirement plans and M&A, were:

* Don’t underestimate the time required to craft an effective design or to get necessary stakeholder approval.

* Don’t underestimate the time needed to define the requirements and adjust recordkeeping systems.

* Consider timing the freeze with other benefit changes or other initiatives.

* Involve a broad team to address various topics (including legal, accounting, finance, etc.)

* Make sure participants know the difference between a pension freeze and a pension termination.

* Consider whether changes impact union workers, if any.

* In communications, make sure to include the rationale for the change and be straightforward about it. Also balance the need to provide advance notice of the change with sufficient details of the change.

* Don’t avoid addressing uncomfortable topics (such as benefit reductions).

* Include non-experts on the communications team so they can help frame the message to workers who are not as knowledgeable about financial issues.

Two More Years? Or Six More?

On the same day President Obama began his re-election campaign, Shawn McBurney, senior vice president of govermental affairs at the American Hotel and Lodging Association, spoke of the way the hospitality industry was being targeted by his administration.

“For those of you who feel persecuted, you should,” he said, noting that the Department of Labor, Occupational Safety and Health Administration and National Labor Relations Board, to name just a few, are looking hard to find violations of workers’ rights.

The DOL, he said, believes the hospitality industry “is evil and they are targeting the industry.”

The comments were part of a session on public policy and HR strategy at the 5th Annual HR in Hospitality® Conference, which drew more than 275 attendees to the Marriott Wardman Park in Washington. The event runs April 4 to 6.

And even when there is not ill intent, off-the-cuff comments by politicians can be harmful, said Geoff Freeman, executive vice president of public affairs and strategy development at the U.S. Travel Association. He mentioned Obama’s infamous-in-the-industry remarks about discouraging travelers from going to Las Vegas, Vice President Joe Biden’s remarks about not traveling by air when fears of swine flu were rampant, and a U.S. General Services Administration notice to the effect that any trips not taken are good for the environment.

That last statement, Freeman said, was made without any study being done or being grounded in any data. In fact, he said, the truth might be just the opposite: Employees who are on business trips or at conferences may use less energy because they are grounded in one spot and are not driving to work or taking subways every day.

Regardless of whether Obama wins re-election or not, however, the deficit may drive whoever is in power to reconsider the ability of companies to write off healthcare and retirement costs, said Mike Aitken, director of governmental affairs at the Society for Human Resource Management. Those two tax write-offs offer the most potential revenue to the government, ranking even above the home-mortgage deduction.

Companies should also be wary, Aitken said, of actions emanating from the Equal Employment Opportunity Commission, which has been examining “barriers to employment,” including age, credit reports, criminal-background checks and even unemployment. Credit and criminal checks, he said, are areas the EEOC is “particularly interested in.”

Immigration is another area where the government believes “we are the bad guys,” Aitken said. The Department of Homeland Security collected $1 million in fines in 2009 from-employer violations. In 2010, he said, the total fines collected were $7 million. And DHS is continuing to increase its enforcement efforts.

Worker Envy

Relative to my recent post about the outcry over the lucrative pensions granted public-union workers comes this story about a federal investigation into the California Public Employees’ Retirement System.

Calpers, as it is know, “lost about a quarter of its total investment portfolio during the financial crisis, leaving the state responsible for replacing billions of dollars each year and contributing to its huge deficit.”

It is America’s largest pension fund with assets of about $220 billion.

The Wall Street Journal had a story at the end of last year about the way the rising costs of pensions and healthcare for public-sector workers was causing many governments to raise property taxes — another reason for the rising unfavorability ratings for unions.

But, even as the public is upset with union benefits, most workers only wish they were so lucky.

A recent story on HREOnline™  looks into a recent survey, which finds that employees and job candidates are much more attracted to employers with defined-benefit plans than those without such a benefit.

Now that the recession has increased fears about living comfortably in retirement, HR leaders seeking to attract and retain top talent might want to consider looking into the financial ramifications of adding — or unfreezing — their pension plans.

And for companies that have active plans, HR should consider highlighting their DB plans in their recruiting and retention efforts.