The Haves vs. The Have Not


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Expert Perspective from Grahall’s OmniMedia Editorial Board

expert perspective telescopeThe Wall Street Journal offered several articles recently that illustrate the dramatic contrasts in employer sponsored benefit programs available to the “rank and file” workers versus management.  The first article “Companies Plan to Reinstate 401(k) Matches”  by Jillian Mincer published in the October 22, 2009 describes a good news/bad news scenario associated with the return of the matching contributions to 401(k) retirement plans.  Mincer says “Many businesses are quietly restoring plans to match a portion of their employees’ 401(k) contributions.”  That is good news for employees of these companies and is also an indicator of economic recovery. 

But Mincer continues saying: “…more companies are planning to make the match dependent on the company’s profitability. Companies may also choose to distribute benefits at year-end, which means employees could miss out on the distribution if they leave before then.”   Perhaps this doesn’t really qualify as “bad news”, but it clearly isn’t the “best news” for employees. 

One way employers manage the cost of matching contributions to 401(k) retirement plans is by making the contributions harder for employees to receive with waiting periods, annual (rather than monthly) allocations, extended vesting (within certain IRS limits), and conditioning match on profit levels.  All these techniques help the company’s bottom line and profitability in the short term by, effectively, reducing employees’ retirement incomes in the long term.

But even more than just the good news/bad news with regard to 401(k) matching is the striking difference in what executives receive in retirement income versus rank and file.  Another Wall Street Journal Article recently covered this topic.  The article,  “Pensions for Executives on Rise Arcane Techniques, Generous Formulas Boost Payouts as Share Prices Fall” was authored by Ellen Schultz and Tom McGinty and published on November 3, 2009.  The authors share that “Pensions for top executives rose an average of 19% in 2008, with more than 200 executives seeing pensions increase more than 50%, according to a Wall Street Journal analysis.”

They continue saying: “Executive pensions rose even as the share prices at the companies declined an average of 37% in 2008 and many firms froze employee pensions and suspended retirement-plan contributions.”

There are several important historical perspectives here that can help us understand the critical issues associated with the very different circumstances that exist with regard to retirement plans for employees and those and those for management. 

Taking a look back through the Grahall Expert Perspective archives, we find several blogs that talk to these issues.  Last December, Grahall’s Robert Cirkiel shared in the blog 401(k) Plans are Easy to Fix: Use A Hammer that “401k plans became the prevalent form of retirement plan for reasons unrelated to benefits adequacy. Their growth began in the 1980’s concurrent with the increasing foreign ownership of American companies. From the foreign owner’s perspective, pension plans (and for that matter, retiree medical plans) are a long-term obligation that can impact the balance sheet way beyond the life span of a company.

Not knowing how long a haul their American commitment was, they preferred the 401k’s because, from a balance sheet perspective, the assets always equal the liabilities… Baby boomers, who were the first to embrace 401(k) plans, imagined that they would have both personal savings through 401(k) and retirement security through pension plans, but that’s not the case in many companies. 401(k) plans have replaced traditional pension plans and now with the decline in account balances, the aging boomers can’t afford to quit.” 

Where 401(k) plans are the only component of the company’s share of the “3 legged stool” (i.e. retirement income provided though personal saving, company plans and government benefits) it is at best a very weak leg.   401(k) balances have been decimated in the market decline and some individuals have been forced to drain their 401(k) balances through loans and hardship withdrawals simply to cover living expenses and avoid home foreclosure, further reducing their future retirement funds. 

Last but not least, the need to voluntarily suspend contributions by some employees in order to “make ends meet” coupled with the suspension of employer matches has resulted in 401(k) participants losing out on dollar cost averaging.  That is the chance to purchase shares at the low prices that have been in effect for the past many months.   Had those contributions been made and purchased low cost shares, the participants would have seen a dramatic increase in account balances when share prices begin to rise.  Assuming, of course, that the participants made wise investment choices. 

In the Grahall blog from May 2009, What It Really Means to Have Only a 401(k) Plan for Your Retirement  Michael Graham shared that “Initially, employees loved ‘k’ plans because they provide “portability” of benefits. That was when jobs were plentiful ….  But what does ‘portability’ really mean in a recession where jobs are scarce and the recovery may be months or years away? [But] for executive level and key employees, there will always be unique supplemental bonus plans and reward programs to support them.”

The “dirty little secret” in Executive Total Rewards Strategy is that executives have lots of money squirreled away for them in SERPs (Supplemental Executive Retirement Plans).  SERPS, unlike defined benefit pension and 401(k) plans, are “non-qualified”.   That means the benefits are not protected in the case of bankruptcy or other dire circumstance, nor are they tax deferred.  But the fact that they are “unqualified” give companies the opportunity to create formulas that render potentially very high benefits levels for executives. 

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.  

Back to the employee side of benefit plans again.  Companies who have frozen their employee defined benefit pension plans (DB plans) may soon discover that they have really handcuffed themselves.   For years, DB plans were used in part as a tool to help manage attrition at large companies. Essentially companies build “war chests” of funds in these plans and then when they needed to motivate individuals to retire for whatever the business reason there were funds available in the DB plan to offer rich “early retirement windows” to eligible employees. 

Without a DB plan and with a workforce unable to retire on its 401(k) balance, companies will be hard pressed to create situations where segments of their workforce can be motivated to retire.  And as Robert Cirkiel said in our blog From Here to Eternity  “if a company thinks covering a 65 year old retiree’s health care is expensive, wait until they see what it costs to cover a 65 year old worker”.

So what’s a company to do if it can’t “inspire to retire”?  Well perhaps employees will leave for another job (should there be one).  There is no doubt, as we shared in our blog, It’s Complicated  that “Years ago, reciprocal loyalty between companies and employees was a stronger motivator.  That bond was broken when, a few years back, employers remixed compensation away from long-term retention tools — such as pension plans and retiree medical plans — to shorter-term programs like a 401(k), the latest benefits to be cut back.” So maybe these employees will leave becoming “Talent for Hire” to the company with the highest pay or signing bonus, or to the company with a pension plan or a rich 401(k) matching feature. 
But if these folks don’t quit, then what?   A company must consider the consequences of an aging workforce including heath and productivity. 

Let’s do another very quick history lesson.  Heath Care plans were first thought of as an entitlement, then they morphed to become a component of total remuneration and that is for the most part how they are viewed today.  But in the very near future companies might be wise to change the perspective around these plans again and view them as productivity tools. 

The fact that companies have an older workforce is more by chance than by design, what with the transition to 401(k) plans and the demise of DB pension plans which has left many baby boomers unable to retire.  It will become important for companies to keep this older workforce healthy and productive.   With an aging in workforce, companies need to build heath care plans that promote wellness, that get and keep employees healthy.  

As the saying goes, you reap what you sew.  Companies have the chance to revisit their Total Rewards structure, to find or create the tools to handle attrition management and workforce planning, and most importantly (as our history lessons have shown) to look at long-term consequences of their decisions. 
Companies also have the chance now to take a close look at rewards programs at every levels of the organization.  As we shared on our blog Treat the Disease, NOT the Symptom  “Boards make sure their compensation decisions are defensible, transparent, easy to communicate and solidly understandable” because if they are not, you might find yourselves on the pointed end side of the “pitchfork” crowd.

Contact Grahall’s Editorial Board at

For more on the level of pay disparity read Grahall Blog Let Them Eat Cake.


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