1-18-06, 9:04 am

Employers have escalated their attempt to abandon pension plans. Although freezing pension contributions was once a tactic used primarily by companies with falling profits, this strategy is now pursued by highly profitable companies to cut costs and raise earnings.

The latest blow came from IBM, which announced on January 5 that it will freeze its pension plan. It now joins Verizon, Lockheed Martin, Motorola and other successful companies that have frozen their plans for the existing workforce and terminated them for all new hires. All of these employers announced that they would use 401(k) plans as a substitute for pension benefits.

More workers will now join the ranks of the impoverished retirees who must rely on minimal Social Security benefits. The Bush administration and employers are pushing 401(k) plans as an alternative to pensions and attempting to convince American workers that 401(k)s are an adequate substitute. It’s a lie, and they know it.

Employers favor 401(k)s because they cost them only as much as they choose to spend. They are under no legal obligation to create 401(k)s or contribute to them. The plans and any employer contributions to them can be canceled at will.

After 25 years of experience with 401(k) plans, we know that they cannot fill the pension void for a number of reasons:

* 401(k) plans have been available for more than two decades and cost employers almost nothing.

* Less than half of all employers offer a 401(k), according to the latest data from the Bureau of Labor Statistics; even when employers offer a 401(k), only 78 percent of the workers participate in them. Contributing to a 401(k) takes money directly out of a paycheck that is already stretched too thin for many workers. With pay levels now well below a living wage for many workers and real wages falling, putting money into a 401(k) account is not feasible.

* The great majority of workers who do have access to a 401(k) plan and contribute to it cannot contribute enough to secure even the most meager retirement. One in four workers who participate in a 401(k) have less than $5,000 in their account, according to Hewitt Associates. The average combined 401(k) and IRA savings for Americans in their 40s and 50s is only $37,000, far short of what is required in retirement.

* Even when employers offer a 401(k) plan and make a voluntary matching contribution, many workers cannot contribute enough to get the full match. One in five workers does not contribute enough to receive any employer contribution, and another fifth do not contribute enough to get the full match, according to Hewitt.

* Most workers with 401(k)s can and do borrow money from their accounts, further diminishing the amount they will have for retirement. Nearly one-fourth of employees with a 401(k) plan now have an outstanding loan from their plan, according to Hewitt.

* Despite all of the talk about the “portability” advantages of 401(k)s, the reality is that 45 percent of the workers with 401(k) plans cash out their accounts when they change jobs, according to a Hewitt study of 200,000 workers. This is not just a practice among the youngest workers. More than 42 percent of workers age 40-49 elected to cash out of their 401(k) plans upon leaving their jobs.

* Workers no not have the time or information necessary to manage their funds and optimize earnings. Consistent with past years, the majority of employees did not attempt to rebalance or reallocate their 401(k) portfolios in 2004. Only one in six (16.7 percent) actually made a transfer within their 401(k) account in 2004.

* Even for the most carefully invested 401(k) accounts, there is a high element of risk and unsolvable timing problems. At the end of the 2005, the proportion of 401(k) participants’ total balances in stock investments stood at 67 percent, according to Hewitt. 401(k) balances rise and fall dramatically with the stock market, so workers who need to retire during a downturn face vastly diminished retirement funds.

Employers and the Bush administration are well aware that 401(k)s cannot substitute for pension plans in providing a secure retirement. Hewitt’s study of more than 220 large U.S. companies reveals that only six percent are confident their employees will take accountability for their own retirement future this year, down from 12 percent in 2005.

To encourage workers to enroll in 401(k)s, many employers already use automatic enrollment and many more plan to add this feature. Automatic enrollment does nothing, however, to ensure adequate savings for retirement. The move to 401(k)s will simply leave more retirees with only Social Security benefits.



From Labor Research Assocaition