Retirement Heist: how companies plunder and profit from the nest eggs of American workers

Watson Wyatt epitomized the new breed of benefits consultants that was revolutionizing the compensation-and-benefits landscape. In prior decades, benefits specialists handled the garden-variety tasks of pension administration and human resources consulting. That began to change in the 1980s as consultants began more aggressively prospecting for business and developing niche specialties in cutting retiree benefits, boosting executive compensation, and managing mass layoffs and early-retirement windows.

Watson Wyatt was particularly innovative. It developed a suite of demographically inspired services specifically aimed at helping employers evaluate—and reduce—the cost of their older workers. One service was the firm’s “Aging Diagnostic,” which marketing material described as “a tool designed to measure how the cost of compensation and benefits is affected by an aging workforce, so organizations can detect this trend early . . . and begin managing it, before it manages them.”

With one baby boomer turning 50 every eight seconds for the next 10 years, the economic issues of an aging workforce could become a major issue for your company. For every 50-year-old employee in your company, you are likely to pay:

• Twice as much in health care as for a 30-year-old.

• More in base salary and vacation leave, because of longer job tenure.

• Up to twice the employer match on defined contribution deferrals than you would for a 20-year-old, due to higher participation and savings rates.

• More than twice the pension plan contribution rate that you would pay for a 25-year-old.

• Companies that manage this trend early—before it manages them—will create a significant competitive advantage.... That’s where Watson Wyatt’s Aging Diagnostic TM comes in. Our state-of-the-art modeling system uses your data and the latest demographic research to project the total impact of an aging workforce on your compensation and benefits costs.... Companies that want to combat the cost spiral of changing demographics should take a careful look at their current workforce demographics, hiring practices and benefits design, paying special attention to retirement packages.

With little fanfare, IBM rolled out the pension equity plan in 1995 and heard not a peep from the employees. Three years later, it was ready for yet another pension cut. This time it decided to convert the pension equity plan to a cash-balance plan. IBM’s consultants at Mercer Human Resource Consulting and Watson Wyatt calculated that when it switched to the cash-balance plan, approximately 28,300 older IBM employees would stop earning pension benefits for one to five years, while younger employees would begin to build benefits immediately. The net result, though, would be that the pension plan would pay out $200 million less, and most of the savings would come from older, long-service employees, like Dave Finlay.

Finlay was exactly the kind of employee the company was taking aim at: He was fifty-five and had been at the company twenty-six years. As a senior engineer, he had a comfortable, though not lavish, salary. He expected his pension to be the same, and it would have been if IBM hadn’t engineered its series of secret cuts. He began to figure this out in early 1999, after he got a brochure from IBM in the mail announcing that the company was modifying its pension plan to make it “more modern, easier-to-understand, and better suited for a mobile workforce.” Finlay was close to retirement, so he scrutinized the document, trying to figure out how the new pension compared with his old one. The description of the new pension was thin on details, noting only vaguely that employees “will see varying effects” and that those retiring early will “see lower value.” Not good enough.

Finlay went to the internal company Web site, where IBM had long offered a “Pension Estimator” that enabled employees to estimate how much their pension was—and would be—worth, depending on how long they’d worked, their estimated annual pay raises, and other factors. But IBM had taken the pension tool offline. When Finlay called administrators in IBM’s human resources department to complain, they told him the company had taken the estimator down because “it really does not seem appropriate to be modeling a plan that no longer exists.”