Why we should retire 401(k) plans for pensions

October 10, 2012 | John Burbank

John Burbank, EOI Executive Director

Eight years ago, while thousands of corporations were shutting down their retirement plans, the United Methodist Church decided to go back to the future. The Methodists took a lesson from their faith. The Methodist Book of Discipline guides the church in employment practices, and states that the church is “to discharge our fiduciary duty solely in the interests of the participants and beneficiaries, using care, skill, prudence and discipline.” With this in mind, the Methodist established a defined benefit pension.

What is a defined benefit pension? It is a plan for retirement that covers all employees in a company. You earn this retirement as you work. You can rest assured that when you retire, you will get a certain amount of money each month for the rest of your life. It won’t get you rich, but it gives you both financial security and peace of mind. That dovetails well with the Methodists, and in fact, with all of us.

Almost all of us are in a defined benefit pension. It is called Social Security. And it’s the political and financial elite’s favorite punching bag in their assault on entitlements. Never mind that these entitlements are earned. Or that Social Security has been generating surpluses for three decades. Or that it is the most efficient and most effective program to insure retirement security. Or that, unlike almost all other pensions, you can be sure that your Social Security payments keep up with inflation.

Social Security was not meant to provide all our retirement income. That is why unions bargained for retirement plans with big corporations, and why corporations accepted and funded defined benefit pensions as a traditional part of employment. That deal is now broken. Some 85,000 pension plans have disappeared since 1985. These defined benefit pensions have been shut down and replaced, if at all, with deferred compensation — also known as 401(k)s.

How’s that worked out? Not so good. If you have a 401(k), just look at your monthly reports over the past five years and you can verify the zigs-zags of value. You might get a bit worried when you think about retiring and you want to make sure you have enough income. The typical value of these accounts is $18,000. That’ll get you $80 a month.

Why are these annuities so small? It doesn’t take a rocket scientist, or a SPEEA engineer, or a Boeing manager to answer this question. Some employers make no contributions. Some do. But they all contribute less than what they would for defined benefit pensions.

This helps explain why the members of the Society of Professional Engineering Employees in Aerospace (SPEEA) voted down the recent contract offer from Boeing. Boeing proposed to replace defined benefit pensions with deferred compensation for new employees. The impact of Boeing’s contract proposal would have been to cut its contributions for retirement for these new employees by about 40 percent. Putting all these employees’ retirement eggs into deferred compensation leaves their accounts at the mercy of the stock market. Even as they gain value, they also create long-term retirement insecurity.

If an employer wants to guarantee retirement income, then it is a lot less expensive through defined benefit plans rather than through deferred compensation. That’s because with deferred compensation, each individual has to have an account that separately anticipates his longevity. Each individual account has to be enough for a long life for each employee.

Compare this to defined benefit pensions. These pensions pool all the funding to finance an average employee’s retirement years. All retirees are taken care of. They can depend on their monthly stream of income, no matter how long they live. For instance, at Boeing, if you work 20 years, the minimum retirement benefit is $1,660 a month. The “herd” of the defined benefit pension protects the individual retiree.

Unfortunately, what corporate elites focus on is the short term, three-month bottom line. With deferred compensation, these companies can avoid all risk, jettison their fiduciary responsibility, and shift some costs onto employees. While that goes over well on Wall Street, it does not provide a good model for long-term profitability in an industry which cannot afford one engineering, machining or computing mistake.

Would you choose to fly in a plane designed, built and tested by a demoralized and angry workforce, or by well-compensated engineers, technicians, and machinists who are proud of their work and not worried about how they will make ends meet when they retire? I would choose the latter, especially when I am 30,000 feet in the air. I am with the Methodists!

From the Everett Herald

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Posted in Column, Retirement Security, Social Security

Comments

  1. John Gjolmesli says:

    Defined benefit plans are risky. In the mid 90’s when I worked as a negotiator for a major union, we could not make the risk vs. return work out as a positive number for the union members. There were too many “if’s” that could not be addressed and solved. Keep in mind that the company controls the assets in the plan and then disperses the monthly checks. So here are some the questions on must consider:
    1) Can the company guarantee they will survive longer than you?
    2) Can the company guarantee that they will not go bankrupt?
    3) Can the company guarantee that they will not use the defined benefit plan to offset other earnings.
    4) Can the company guarantee that there will be enough money in the plan to pay all retirees?
    5) How will inflation affect the value of the defined fund?
    6) How will profits and losses affect the value of the defined fund?
    7) Who controls the investment of the fund? And can they guarantee that this investment will not lose your money or affect your benefit?
    8) If the company goes out of business what happens to the fund?

    The company I worked for went out of business but since we opted for the 401(k) my contributions were still intact and followed me to my new employer, however many that I work with now had defined benefit plans with previous employers that went out of business and they cannot retire because the retirement income they were “banking” on was now paying them pennies on the dollar through the Pension Benefit Guaranty Corporation (PBGC).
    There were so many more unanswered questions, however what really concerned us was that the company really wanted to have a defined benefit plan rather than contribute to a 401(k) which then begs an answer as to why?…. the only reason would be that the company will save more money because the fiduciary responsibility is to the shareholders and NOT the employees. So it boils down to this:

    Do you want the company to manage and control your retirement funds subject to corporate decisions or; do YOU want to control your retirement funds with a company match to your account? You have to decide who is looking after your best interest. Do you want to bet your retirement on a promise from the management?

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