Tuesday, November 21, 2006

Bait and switch

I watched an interesting special on TV tonight. It was about the big shift that has occurred in funding retirement and in particular how the 401K is not the be-all, end-all that many have made it out to be. For military people and military retirees, this discussion is particularly apt, since my favorite Pentagon dickhead bureaucrat is spearheading the charge to change the military retirement system from one of fairness and defined benefits to one of inequality and uncertainty. Its time for Congress to reject the proposals of the Defense Advisory Commission on Military Compensation once and for all.

Dr Chu wants to take the current retirement system and turn it into a 401K style contribution system-eliminating the ability to retire at 20 years and receive payments and require servicememebers to wait until they are 60 to receive anything for their service-regardless of when they leave the service. For the department of defense it means saving money and elimnating "entitlements"-which allows them to make the proper way of saying it, receiving what you have earned and risked your life for-sound like its a bad thing.

The problem is, the military is very ripe for a phenomenon noted in the program-what they called yield disparity:

HEDRICK SMITH: [voice-over] I was curious. Why would Thibeau and Crabb have such wildly different results with the same 401(k) plan? In Dallas, I found the man with the answer, a corporate benefits consultant with 50 years of experience named Brooks Hamilton.

Originally, Hamilton had been a big believer in the magic of 401(k)s, but by the 1990s, he began to notice troubling differences among employees in the 15 corporate 401(k) plans that he was running.

BROOKS HAMILTON, Corporate Benefits Consultant: They were all large plans with $100 million, $200 million dollars in the plan, and 1,000, 2,000 participants or more, so these were big plans. And they were scattered around geographically, some up East and some on the West Coast.

HEDRICK SMITH: Hamilton dug deep into his 401(k) records, analyzing investment yields for every single worker in every single plan.

BROOKS HAMILTON: We saw the same thing over and over. Say the bottom 20 percent had an investment return for the year ­ for the year ­ of 4 percent. The top 20 percent would be anywhere between 5 and 7 times that number.

HEDRICK SMITH: [on camera] Like 30 percent.

BROOKS HAMILTON: Yeah, 30 percent. Right.

HEDRICK SMITH: [voice-over] According to Hamilton, the huge differences between Thibeau and Crabb reflected a far larger problem.

BROOKS HAMILTON: In every case, the 20 percent at the top not only had the highest investment income ­ like 30 percent or whatever ­ they also had the highest average annual pay, whereas the bottom 20 percent not only had the lowest investment income, 4 percent, they had the lowest average annual pay.

HEDRICK SMITH: [on camera] So what you're saying is the best paid people, the richest people are getting richer, and the middle class workers are falling further behind.

BROOKS HAMILTON: Yes, that's exactly what I'm saying. I label this "yield disparity." I just coined the term. I thought­ we have a yield disparity that is a financial cancer in this ­ in our great, beautiful 401(k) movement. And I had never seen it before, but it was everywhere I looked.

HEDRICK SMITH: What do you mean, a financial cancer?

BROOKS HAMILTON: It would destroy the opportunity for ordinary workers to retire in dignity. They couldn't get there from here.

HEDRICK SMITH: [voice-over] It's a huge problem. Half of America's workers are not covered by any retirement plan. Forty percent are enrolled in some 401(k)-style plans, and according to the latest report from the Federal Reserve, the average family's account balance is only $29,000.

And it's not just average Americans who have trouble making a 401(K) work well. Even the experts have trouble.


The military now has a TSP plan (a version of a 401K) but it does little training for its young people in how to manage that plan-if they even sign up. Guys like Dr Chu however have no such worries since they have been covered by the Federal Employee Retirement System for years and have considerable assets built up from their stints outside of governement when the Republicans lose the White House.

Kind of like this guy:

HEDRICK SMITH: [voice-over] United's senior management got big bonuses to stay on during bankruptcy. Like everyone else, they took a hit on their pensions, but they more than made up for any losses by receiving a grant of $400 million in new stock.

But not everyone's pension was cut.

GREG DAVIDOWITCH: All United employee pensions have not taken a hit. One notable exception is Glenn Tilton, who negotiated as part of his employee contract that a secular pension trust would be established for him, for his retirement security.

HEDRICK SMITH: CEO Glenn Tilton got special protection for his personal retirement benefit, a benefit from his former employer that was bought out by United.

ROBIN GILINGER, Flight Attendant, United: Our current CEO has decided to keep his $4.5 million pension. It was unfair that he was keeping his in his contract and we were having to give ours up.

HEDRICK SMITH: [on camera] How about Glenn Tilton's retirement guarantee?

BILL REPKO: I'm not going there. [laughs] I don't want to go on the record with that one.

HEDRICK SMITH: Is that a good idea, when he's asking other people's pensions to be put on the chopping block?

BILL REPKO: You know, Glenn­ Glenn did a great job. I think Glenn's compensation was appropriate under the circumstances.

HEDRICK SMITH: [voice-over] Glenn Tilton declined FRONTLINE's repeated requests to talk about United's bankruptcy. But the company says it is rehiring again, training 2,400 new flight attendants to replace some of the more than 5,000 who left during bankruptcy. United says it saved 55,000 jobs out of 83,000 pre-bankruptcy. Its financial advisers boast that United saved $7 billion a year in costs through bankruptcy. Five billion dollars in cuts came at the expense of employees and retirees. Unions report pension losses for more than 50,000 people because the government's payout formula from the PBGC is lower than United's contracts.

GREG DAVIDOWITCH: We're looking at the abandoning of corporate responsibilities. We're looking at changing the expectation of the middle class with regard to health care and retiree benefits. And it's just not United Airlines. It's happening all across the private sector in America today.

JAMES H.M. SPRAYREGEN, United Bankruptcy Attorney: The restructuring business or the Chapter 11 business is just part and parcel of the American economy. I call it the efficient working of American capitalism.

HEDRICK SMITH: That efficiency took a heavy personal toll on rank-and-file employees, people like 42-year-old flight attendant Robin Gilinger. Gilinger says she lost pay, some benefits and 30 percent of her pension.

ROBIN GILINGER: Because of the bankruptcy, I have gone through great changes in the time I'm away from my family and the time that I have


Tilton is not the only one who has gotten rich on the backs of his employees. Its a cautionary tale of what Lou Dobbs hammers on every day-the war on the Middle Class. Get rich and life is good. Be in the middle or below, well you get to see your buying power reduced every year. But hey, not worry, the economy is doing great.
And those United Employees don't have the added extra bonus of being shipped off to a place where they might get killed or lose a limb.

One of the things people forget is that the 401K system was never intended to be a primary source of retirement income. It was always meant to be a supplemental way to add to the base retirement plan of many companies. However, thanks to some obscure changes to the tax code, corporate greed and increased pressure to cut costs-companies quickly found that they could shift the burden to their employees and save 50% in retirement funding costs. Which increased the value of the stock options the executives held.

Remember that the next time some SES-2 or Flag officer tells you that we need to change the compensation system. They have their money-will you have yours?

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