Boeing's Pension Scale Back Is a Sign of the Coming Times

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The past week has brought two ultimately related pieces of news. Boeing announced it would freeze pensions for 68,000 non-union workers and move them into a 401(k)-style retirement plan, according to Bloomberg. The change starts in 2016 and is intended to cut costs, according to the report.

Separately, AARP conducted a survey on baby boomers -- people aged 46 to 64 -- and their current financial status. The short answer was pretty bad. Only 22 percent described themselves as doing very or extremely well. Another 46 percent said somewhat well and 31 percent replied not very well or not well at all. Taken together, the two stories provide a disturbing snapshot of retirement. It's likely to look ugly for many.

Boeing made a shift to reduce its costs of retirement benefits, ultimately by reducing the benefits themselves. There's nothing unusual about this. The Pension Rights Center has a list of close to 200 companies that have made "significant" changes -- terminations, changes in benefit levels, and freezes -- to their benefit plans and is not a comprehensive collection. In fact, Boeing made a major change in 2008.

Know what you're getting
To understand changes in corporate retirement policies, it's important to know some terminology. There was a time when large corporations offered a defined benefit retirement plan. As the U.S. Department of Labor explains the concept, a defined benefit plan, "funded by the employer, promises you a specific monthly benefit at retirement." That amount may be an absolute dollar figure or it could use a formula, taking into account years of service, salary, and age.

From a company's view, there's a problem: defined benefit plans require a significant expense on the corporation's part. The employer puts money into a fund and invests it over time with the expectation that the income made from interest will more than cover the obligations owed to retired workers. If things go badly over a few years -- for example, the financial services industry acted so recklessly that it undermined the entire global economy (hard to believe, eh?) -- the pension fund might not make the returns it needed. In that case, the company would have to kick in more.

So, to trim costs (thus increasing profits), corporations moved to so-called defined contribution plans. According to the Department of Labor, such plans don't make any promises about what employees will receive. Instead, they define how much money the company will contribute. Unlike a defined benefit plan under which the company is responsible for the investment strategy, many defined benefit plans leave the worker to decide how much to contribute and where and how to invest it, through a mechanism like a 401(k) program. Employers may match a certain percentage of your contribution, but they must offer to do so. At retirement, you get the lump sum left.

But most people are atrocious at investing. Even professionals are. Typically the general performance of the S&P 500 largest stocks beats the vast majority of professional money managers. Not only is it much harder to always pick winners, but the fees that provide the profits to investment funds drain the results consumers would otherwise see.

Didn't see it coming
The result can be a nasty surprise. According to the AARP survey, 43 percent of people were doing worse financially at their age than they expected, with another 36 percent saying they were doing as they expected. Twenty percent said doing better than expected. Not only are few people doing well, but many are shocked at how badly off they are.

The kicker is that 401(k) plans were never conceived as a substitute for pension plans, according to Marketplace. Ted Benna was a financial consultant who invented the concept as a way to improve retirement savings. They were a financial product and never intended to replace pension plans.

However, they are much cheaper to implement and maintain than a traditional pension plan and it gives a company a talking point when hiring that it offers an approach to retirement.

In addition, as Ellen Schultz, who covered corporate pension plans for years for the Wall Street Journal, told NPR, corporations have also badly used pension funds. According to Schultz, companies collectively had plenty of money to pay benefits but saw all the cash as going to waste, and they "found creative ways to spend the money to boost profits." She offered GE as an example of a company that claimed it had to close the pension plan to be more competitive. "But if people look at the financial filings, they'll see that GE has not put a cent into their pension plans since the mid-1980s," she said. "Over the years, GE, like most large companies, has used assets in the plans to pay for other things."

Sadly for workers, none of the mechanisms used is illegal. You're likely stuck with a 401(k), if that. What to do? Make the best of a bad deal and use advice from Warren Buffett, as reported by Reuters. When he dies, 90 percent of the money his wife inherits will go into a low-fee index fund that tracks the S&P 500 (a Vanguard fund, specifically). The other 10 percent will be in short-term government bonds.

Why? Because Buffett, as smart an investor as you'll find, knows that most people won't come close to beating the market. "I believe the trust's long-term results from this policy will be superior to those attained by most investors - whether pension funds, institutions or individuals," he wrote in his annual letter to the investors in his company, Berkshire Hathaway.

As one critic of the approach told Reuters, putting that much into stocks might be too risky for most investors, particularly in the short-run. But even if the balance is off for many, the basic concept is likely sound.

Image: Flickr user SalFalko
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