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

Top officers at Cummins Inc. also had a choice of investment options: the return on the S&P 500 Index, the Lehman Aggregate Bond Index, or 10-Year Treasury Bill + 2%. All the top executives selected only winning investment options, and had a total of $1.4 million in gains on their accounts. Meanwhile, the employees of the Indiana-based engine maker lost 12 percent on their 401(k) retirement accounts. A spokesman had an explanation for this investment success: “These are more senior people who can be expected to make more conservative investment choices than a 25 year-old in the 401(k).”

Employees who saw their retirement savings slaughtered then had another setback: Hundreds of companies stopped contributing to the 401(k) accounts at all. United Parcel Service was one of the larger ones: It suspended contribution to its 60,000 employees’ 401(k) plans in 2009. The move saved the global package delivery company $190 million that year. The company blamed the “challenging worldwide economic environment” for its decision.

But the company’s cost cutting didn’t extend to stock awards for highly paid managers and executives: It paid a few thousand of them more than $450 million in stock awards that year, an increase of almost 10 percent over the year before. “The Compensation Committee believes that the retirement, deferred-compensation and/or savings plans offered at UPS are important for the long-term economic well-being of our employees, and are important elements of attracting and retaining the key talent necessary to compete,” noted the March 2009 proxy.

UPS is part of a broader trend that hasn’t been highlighted in annual reports, analyst surveys, or benefits consultants’ reports to the media: Even as they limit or suspend contributions to 401(k)s, employers have been awarding a growing amount of stock compensation to their upper ranks. This isn’t just stock options, whose ultimate value can be a crapshoot. Most of this is in the form of restricted shares, which have an actual, defined cash value to the recipient.

Comcast’s expense for stock awards and options was $208 million in 2008, up 27 percent from the year before. The expense for the 401(k) plan: $178 million.

Honeywell employees also took a one-two blow to their 401(k)s. The 178,000 employees in the “Savings and Ownership Plan” (a KSOP) lost 29 percent of their savings. Senior managers at the engineering-and-aerospace conglomerate, however, enjoyed guaranteed returns ranging from 6.3 percent to 10 percent. The next year, in 2009, Honeywell cut its 401(k) match in half and said it wouldn’t increase it “until there is greater certainty in the economy.” By 2010, the expense for the 401(k) plans had fallen to $105 million from $220 million in 2008. Stock compensation expense, meanwhile, grew 28 percent over the same period, to $164 million.

Regardless of whether companies are suspending contributions, dozens are spending more on stock awards than they are for 401(k)s: Kraft Foods, State Street Bank, Dell, Marriott, and International Paper, just to name a few.

The trend hasn’t been studied, but it might be worth a look. Employer contributions to 401(k) plans and awards of restricted stock have a lot in common. Both are forms of deferred compensation—i.e., pay for services rendered today that employees don’t receive until later. Both are subject to vesting rules, meaning that employees and executives can forfeit the company contributions if they don’t stay long enough to lock them in. Employees don’t pay income taxes on contributions to 401(k)s until they withdraw the money, nor do they owe income taxes on restricted shares until they cash them in.

The chief difference, as we’ve seen, is that savings plans for employees don’t create a liability; deferred comp and restricted shares do. So, as companies shift more of their retirement resources from employees to executives, they’re also adding to their retirement obligations.

HELPLESS

The architects of today’s retirement mess—consultants and financial firms—have also played a non-starring role in the public pension debacle. The difference was that, while they helped private employers hide pension cuts and exaggerate their pension woes, they also helped public employers quietly boost benefits and hide the growing liabilities.

They not only helped private companies drain assets from pension plans, but also helped public employers avoid contributing in the first place, enabling legislators and politicians to conjure up cash for popular projects, without raising taxes, and look like community heroes.

And while they were helping private employers to load their retirement plans with stock, some consultants and financial firms duped many public pension managers into investing in complex and risky derivatives whose value later exploded, just like the subprime loans with low teaser rates that predatory lenders conned millions of homeowners into.