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

Meanwhile, the same crowd that created this mess—employers, consultants, and financial firms—are now the primary architects of the “reforms” that will supposedly clean it up. Under the guise of improving retirement security, their “solutions” will enable employers to continue to manipulate retirement plans to generate profit and enrich executives at the expense of employees and retirees. Shareholders pay a price, too.

Their tactics haven’t served as case studies at Harvard Business School, and aren’t mentioned in the copious surveys and studies consultants produce for a gullible public. But the masterminds of this heist should take a bow: They managed to take hundreds of billions of dollars in retirement benefits that were intended for millions of workers and divert them to corporate coffers, shareholders, and their own pockets. And they’re still at it. It might not be possible to resuscitate pension plans, but it isn’t too late to expose the machinations of the retirement industry, which has its tentacles into every type of retirement benefit: profit-sharing plans, 401(k)s, employee stock ownership plans (ESOPs), and plans for public employees, nonprofits, small businesses, and even churches. The retirement industry has exported its tactics, using them to achieve similar outcomes in retirement plans in Canada, Europe, Australia, and elsewhere, and has big plans for Social Security and its overseas equivalents as well. Unless it is reined in, the global retirement industry will continue to capture retirement wealth earned by many to enrich a relative few.

CHAPTER 1

Siphon: HOW COMPANIES PLUNDER THE PENSION PIGGY BANKS

IN NOVEMBER 1999, a group of the nation’s leading pension experts met atat the Labor Department in Washington to discuss a $250 billion problem. After eight years of double-digit returns, the pension plans at American corporations had more than a quarter of a trillion dollars in excess assets. Not a shortage of assets—excess assets. At some companies, the surpluses had reached almost laughable levels: $25 billion at GE, $24 billion at Verizon, $20 billion at AT&T, $7 billion at IBM.

One might expect that such lush asset balances would be something to celebrate.

Pension assets had been building for years, the result of downsizings, a robust stock market, laws enacted in 1974 that required employers to adequately fund pensions, and a 1990 law that made it harder for them to raid the surplus by terminating their pensions.

Thanks to this, many employers hadn’t contributed a cent to their plans since the 1980s, yet they still had enough money to cover the pensions of all current and future retirees even if they lived to be one hundred. With so much money, the plans would cost the companies nothing for years to come.

But employers weren’t celebrating. The money was burning a hole in their pockets. In theory, surplus pension assets are supposed to remain in the pension plans, to provide cushion for the inevitable times when investment returns are weak and interest rates fall. But employers felt that requiring companies to use pension money only to pay pensions made no sense.

“Rigid and irrational legal restrictions trap these surplus assets in the pension plans and prevent them from being used productively,” maintained Mark Ugoretz, the head of ERIC, a group that lobbies for employers on benefits matters.

Complaining that the pension assets were “locked up,” employers had asked the ERISA Advisory Council to study the issue. Employers had good reason to believe that the council would recommend changes they wanted. The council consists of fifteen members, appointed by the secretary of labor, to advise the department on benefits matters.

The revolving cast includes representatives from think tanks, academia, unions, and pension administrators. But the council has often been dominated by corporate representatives, who influence the choice of topics and suggest which expert witnesses should testify. Nine of the fifteen appointed members of the council at the time were representatives of employers and financial firms, and many of the experts they invited to testify not surprisingly shared employers’ views.

At the 1999 hearings, executives from DuPont, Northrop Grumman, and Marathon Oil strongly advocated allowing employers to withdraw pension money to pay for their retiree health benefits. This would not only be good for retirees, they said, but good for retirement security overall.

John Vine, a lawyer from Covington & Burling, a Washington law firm that had advised clients on myriad methods to monetize their pension surplus, discussed ways employers could extract the assets in mergers or use them to pay severance costs or even to “provide enhanced pension benefits to a subclass of the plan’s current participants” (e.g., the employer’s executives).