Expert Perspective by Grahall’s OmniMedia Editorial Board
A couple of recent articles on retirement programs caught our eye. First was the February 27, 2010 article by Dan Fitzpatrick in the Wall Street Journal (Retirement Benefits for BofA’s Lewis: $83 Million). The article’s title alone is eye opening, and Fitzpatrick goes on to say: Mr. Lewis, who retired Dec. 31 …. According to [a securities] filing … is eligible for about $57 million in pension benefits, about $11 million in deferred compensation and an additional $4.6 million in vested and unvested stock.”
Wow, we hope Mr. Lewis has a pretty big nest built to hold that retirement nest egg! Lewis’s retirement payment seems even more fantastical when contrasted to the February 10th article in World at Work “Employers Plan to Restore 401(k) Match in 2010, Survey Finds” that says: “… high on employers’ priority lists for 2010: restoring company 401(k) matches that were suspended or reduced during the market downfall…”. The article goes on to say: “… [there is] a continued emphasis among employers on automating 401(k) plans to help workers maximize the benefits of their retirement plans.”
Few companies still offer defined benefit retirement plans to employees. In the early 80’s a cheaper option appeared in the form of 401(k) plans, and before long many companies froze employee pensions and replaced these expensive balance sheet drainers with 401(k) plans. For employees who contribute their own money many companies will kick in a matching amount, most often around 3% of employee pay (assuming the employee puts in 6% of pay).
So without defined benefit pensions what might an employee with only a 401(k) retirement savings expect to have as a nest egg?
An article titled “What are Average Retirement Savings for Different Age Groups?” (taking data from the Congressional Research Service (CRS), Retirement Savings and Household Wealth in 2007), 401(k) Planning.org says, “The more time that a person has until reaching retirement (i.e. the younger), the greater the opportunity to make additional contributions and for investment earnings to build up his or her retirement account balance. Unfortunately, the best retirement savings by age data available predates the 2008-09 financial meltdown.”
If we look at this data for the group of folks most close in age to the 62 year old Mr. Lewis, the average account balance (for people age 55-64) is $272,000 and the median is $100,000–a far cry from $83 million.
In our November 9th blog, “The Haves vs. The Have Not” we say: “SERPs have the ability to create an elite “management aristocracy” (based on money not bloodline) with the management “haves” having lots and lots of money with which to retire. There is no question in our minds that a backlash from Main Street, coupled with pressure from media and government will soon bring heightened focus onto these non-qualified plans.”
But let’s go a behind the numbers.
There are other significant differences between executive pensions and employee retirement programs. The first is that executive pensions–especially those that result in numbers like $83 million– are “unfunded and non-qualified”. They are called SERPs (supplemental executive retirement programs) and essentially they are unprotected benefits. Executive pensioners would stand behind general creditors for payment in the case that a company went bankrupt. 401(k) plans are fully funded and are protected from creditors, if not from market losses.
Another major difference between SERPs and 401(k)s are that SERPs are used as powerful retention tools when they are properly designed. 401(k) plans, on the other hand are best known for their portability. That is, you can take your account with you when you leave a company and roll it over to an IRA or a new employer’s plan without tax consequences. Retention tools, they are not.
For more Grahall perspectives on employee and executive benefits read:
• What It Really Means to Have Only a 401(k) Plan for Your Retirement
• 401k Plans are Easy to Fix: Use A Hammer
And for more on the implications of low retirement savings on workforce design read:
• From Here to Eternity
• It’s Complicated
Contact Grahall’s OmniMedia Editorial Board at email@example.com