Archives for March 2007

It’s been a few years since the United Airlines debacle where they unloaded their pensions onto the government-created Pension Benefit Guaranty Corp, but the future of pensions are still a huge issue for many people. If you’re interested in more background, try perusing this New York Times article called The End of Pensions. It’s long, but I found it fascinating.

First, some background:

It happened that 401(k)’s, which were authorized by a change in the tax code in 1978 and which began to blossom in the early 1980’s, coincided with a great upswing in the stock market. It is possible that they helped to cause the upswing. In any case, Americans’ experience with 401(k)’s in the first two decades of their existence was sufficiently rosy that few people shed tears over the slow demise of pension plans or were even aware of how significantly pensions and 401(k)’s differed. But 401(k)’s were intended to be a supplement to pensions, not a substitute.

I find it very ironic that companies are failing to provide for their employee’s retirements, just like individuals are now accused of failing to provide for their own retirements. Simply put, these corporations used rosy predictions to justify not saving enough money!

Given that pension promises do not come due for years, it is hardly surprising that corporate executives and state legislators have found it easier to pay off unions with benefits tomorrow rather than with wages today. Since the benefits were insured, union leaders did not much care if the obligations proved excessive. During the previous decade especially, when it seemed that every pension promise could be fulfilled by a rising stock market, employers either recklessly overpromised or recklessly underprovided – or both – for the commitments they made.

Gee, that sounds kind of familiar. You could partially blame the government for their lax accounting and lack of good funding requirements. Still, if the government provided the bullet the companies pulled the trigger:

For example, United Airlines did not make contributions to any of its four employee plans between 2000 and 2002, when it was heading into Chapter 11, and made minimal contributions in 2003. Even more surprisingly, in 2002, after two of its jets had been turned into weapons in the Sept. 11 disaster, and when the airline industry was pleading for emergency relief from Congress, United granted a 40 percent increase in pension benefits for its 23,000 ground employees.

So what does the future hold?

In 1980, about 40 percent of the jobs in the private sector offered pensions; now only 20 percent do. The trend is probably irreversible, because it feeds on itself. Hewlett Packard, for instance, must compete with younger companies like Dell Computer that do not offer traditional pensions.

And what about state and city governments? Chances are that they’re underfunded too.

Because public pension benefits are legally inviolable, default is not an option. Sooner or later, taxpayers will be required to put up the money (or governments will be forced to borrow the money and tax a later generation to pay the interest).

Thus, unions can bargain for virtually any level of benefits without regard to the state’s ability, or its willingness, to fund them… At least in the private sphere, there are rules – ineffectual rules maybe, but rules – that require companies to fund. In the public sector, legislatures wary of raising taxes to pay for the benefits that they legislate can simply pass the buck to the future.

Yet another form of focusing on short-term gain and not looking at the big picture. Sigh.

A couple of people have asked me about rolling over their 401(k) plans into an IRA. I actually went through the decision process myself back in the middle of 2005, but that was 500 posts ago so nobody can find it anymore! Here they are:

Part 1 – Stay put with old 401k?
Part 2 – Maybe Rollover into Fidelity?
Part 3 – Vanguard Options
Part 4 – Final Decision

The main differences between then and now is that (1) there are more low-cost ETF options available now that cover just about every asset class, and (2) more brokers that offer cheap or free trades. If you are rolling over a lump sum and don’t plan to trade very much, ETFs may present a lower-cost alternative. Still, if I had to make the decision again today I think I would end up at the same conclusion. My expense ratios are already low, and I make enough trades that the net cost difference is minimal. I continue to be very happy with the competent and helpful support from Vanguard. My portfolio has since changed from their Target Retirement funds to something slightly more complicated.

I should add that I also opened a Self-Employed 401k with Fidelity last year, and have also been very satisfied with their customer service. I still wish they would expand their Spartan index fund lineup, though, and if Vanguard offered a low-cost Self-Employed 401k option I would have went with them.