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

Thanks to double-digit returns during the ensuing mortgage bubble, combined with gains from pension cuts, the plans were collectively fully funded by 2007. But pension managers had no margin for error. The percentage of plan assets in stock still exceeded 60 percent, and when the subprime crisis arrived in late 2008 and 2009, it erased as much as one-third of the assets in pension plans.

By then, employers had already consumed the huge cushions of surplus and had used up the stockpile of credits. Their solution: Many that hadn’t already done so froze their plans.

This ability to cut pensions when the plans had investment losses effectively shifted the investment risk to employees and retirees. It’s a trend that has upended the risk-reward trade-off in retirement plans: In 401(k)s, employees bear the investment risk but also keep all the upside. In pensions, employers are supposed to bear the investment risk and keep the upside. Not anymore.

The real problem with pensions isn’t “volatility.” It’s that the accounting rules enable employers to gamble with retirees’ money and then shift the risk to them. And if the plans collapse altogether, companies can shift the risk to the PBGC.

Having shot off their own toes, employers are now seeking “funding relief,” which would enable companies with weak pension plans to delay putting money into them: Forcing them to contribute to their pensions, they say, will divert precious cash they need to avoid layoffs, hire new workers, and create more jobs.

Their argument, some version of which has been around since the dawn of ERISA funding rules sounds plausible to many lawmakers on both sides of the aisle. But companies seeking funding relief fail to acknowledge that most of their current woes are self-inflicted. They took on too much risk but failed to fund when the party inevitably wound down. They withdrew too much money—and in many cases paid their executives too much compensation—instead of contributing to the pension plans for retirees. Their pleas for funding relief are little different from the banks asking for bailouts after their own risky lending practices and financial shenanigans brought the economy to its knees.

Companies in financial trouble, and with chronically deficit-riddled pensions—notably automakers and steelmakers—are the ones pushing most aggressively for funding relief, though they’re the very companies that shouldn’t get it. Likewise, financially troubled companies with well-funded plans don’t need relief, either: What’s really needed is laws that make it tougher for companies to terminate their pensions to capture the surplus money.

Healthy companies with well-funded pensions certainly don’t need “relief.” Many are sitting on record amounts of cash and are happy to contribute billions to their plans. The contributions are deductible and grow tax-free, while the expected investment returns provide a guaranteed lift to profits. Because remember: If the investments were outside the pension plan, the only way to get income from them would be to sell them, pay taxes on the gains, and report what’s left as income. Add to these tax benefits the variety of ways employers can tap the assets and the pension plan looks like a pretty nice place to park money. And, as the ERISA Advisory Council demonstrated in their meeting in 1999, the surplus is never really locked up.

What these healthy companies with healthy pensions really want is the ability to stuff even more money into their pension plans, which they’re prevented from doing. Congress enacted the full funding limit in 1987 to prevent employers from using their pension plans as tax shelters. It prohibits employer contributions if assets exceed 150 percent of the current liability. Employers have lobbied to undo this regulation ever since.

Bottom line: When it comes to funding rules, employers don’t want to be forced to contribute, yet they also want to be able to contribute as much asas they’d like. They argue that these freedoms would enhance retirement security. We’ve seen how well the current laws work. These “solutions” would only lead to more of the same.

Another reality check: Analysts’ reports on the state of pension funding, which employers, lawmakers, and the media routinely cite, overstate the amount of underfunding. The funding figures come from SEC filings, which include the value of executive pensions and foreign pensions. These are typically unfunded, which brings down the funding percentages, thus making the supposed “underfunding” of employee pension plans in the United States appear worse than it is.

BAD PLAN

As employers phase out pensions, 401(k)s are becoming the dominant way to save. But 401(k)s won’t save the day. Many excellent books have been written about the inadequacies of these plans. They’ve already proven to be failures for young and lower-paid workers, who don’t participate, contribute too little, and then spend whatever they have saved when they change jobs.