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

There’s nothing inherently wrong with a company trying to maximize its tax savings, but it isn’t always a win-win situation for employees. Like the hybrid pensions companies were adopting in the 1990s, these hybrid 401(k)s provide benefits to the employers, sometimes at the expense of employees.

More than 10 percent of the total assets in 401(k)s is invested in employers’ own stock, and at some companies the percentage of employer stock in 401(k)s is even higher, which leaves employees dangerously exposed to the fate of their company and industry. If a money manager put that much of a pension plan’s assets into a single stock, he’d be fired for idiocy and sued for violating fiduciary standards. But retirement savings plans—where the employees bear all the risk—are exempt from “diversification rules” that make it illegal to invest more than 10 percent of a pension plan’s assets in the employer’s own securities. This lack of diversification led to some spectacular debacles, including the $1.2 billion employees at Enron lost when the tech bubble burst.

RISK DIFFERENTIAL

The miracle of the 401(k) was again put to the test in 2008. During the worst market meltdown since the dawn of 401(k)s, fifty million workers lost a total of at least $1 trillion in their 401(k)s when the market cratered in 2008.

Jacqueline D’Andrea, of Henderson, Nevada, was among them. She lost more than 60 percent of the 401(k) savings she’d built over a decade as a manager at Wal-Mart. Her account had grown to almost $20,000 by the beginning of 2008. By the end of the year it had fallen to $6,000. When she lost her job in May 2009, D’Andrea, forty-eight, cashed out her account to pay for living expenses until her unemployment check kicked in. She’s learned her lesson, she says: If she ever has a job again that offers a 401(k), she’ll steer clear. “It’s too risky,” she says. Other Wal-Mart employees did better, but, overall, the 1.2 million employees in the retailer’s 401(k) retirement plan lost 18 percent as the market plunged. Even the employee discount isn’t going to make up for that.

The outcome was different in the corner office. Chief executive H. Lee Scott Jr.’s supplemental retirement savings plan had a guaranteed return of 6.6 percent, which added $2.3 million to his account during the investment storm, bringing the total to $46.7 million.

Employees are expected to bear all the investment risk in their 401(k)s, but when it comes to the executive equivalent of 401(k)s, their deferred-comp plans, that isn’t always the case. The same year that employees were losing upward of 40 percent of their savings, one-quarter of top executives at major U.S. companies had gains in their supplemental executive retirement savings plans that year, thanks to the guaranteed returns many receive.

Comcast, the giant cable operator, provides top executives with a guaranteed 12 percent return on their supplemental savings. This produced $7.4 million in gains for executive vice president Stephen Burke in 2008, boosting his deferred-compensation account to $71 million. The 72,000 Comcast workers lost 28 percent of their savings, a total of $649 million. The average account size by the end of the year: $24,000.

“When the market went down, executives in fixed plans were happier than hogs,” said a benefits consultant in Sacramento who works with employers.

One would think that at the other 75 percent of companies, which don’t offer guaranteed returns for top management, the executives would face the same risk as the employees. Typically, they’re given investment selections that mirror the mutual funds available in the employee 401(k) plans.

But they don’t necessarily face the same risk. Even when given the same investment selections as employees, some executives managed to pick only winning funds.

Don Blankenship, CEO of Massey Energy, the controversial coal company, could have elected to allocate his supplemental savings among eight investment options, including small capitalization, international, and index mutual funds. Most of these funds were down 40 percent or more in 2008. But Blankenship’s account had earnings of $909,939 that year because he apparently allocated his $27 million in savings to the only fund among the eight that had a positive return, Invesco Stable Value Trust, which was up 3.4 percent. Massey employees, who had the same fund selections as the executives, lost a total of $44 million, or 25 percent of their savings.