IBM and Verizon Replace Pension Plans With 401K

JEFFREY BROWN:

IBM, long a leader in can finding the relationship between companies and employees in American corporate life last week became part of a new trend, ending its traditional pension plan. The company announced it will freeze its current plan as of January 2008. Pension benefits accrued before then will not be lost, so current retirees will not be affected.

But after 2007 employees won't gain additional benefits. Instead, IBM plans to strengthen its 401(k) plan for its nearly 120,000 U.S. employees. The company says the move will save almost $3 billion a year.

Traditional pensions are called defined benefit plans and provide a guaranteed retirement income usually based on years of service or earnings. By contrast, 401(k)s are defined contribution plans. Employers withhold a certain percentage of salary and employees decide how to invest it. Some firms match employee contributions. Traditional pension plans are partially backed by the government, 401(k)s are not.

In recent years companies in a number of distressed industries have announced they were unable to fulfill their pension obligations. In 2003, for example, employees at the failing Weirton Steel plant in West Virginia saw their pensions taken over by the Federal Pension Benefit Guarantee Corporation.

That left many longtime workers like Charlie Mitchel scrambling to make ends meet. NewsHour correspondent Tom Bearden spoke to him last October.

CHARLIE MITCHEL:

They took away approximately 25 percent of the pensions, plus you lost your health care benefits that now we have to pay for. And that is a chunk of money that you were planning on for your retirement years.

I mean back to work now, have to work probably until I'm 65 now. You know, and I was hoping that I would be able to just piece things together. Yeah, I'm bitter.

JEFFREY BROWN:

Lou Schorsch, the CEO of the company that took over Weirton, said the plant's survival depended on cutting personnel and manufacturing costs in an increasingly competitive market.

LOU SCHORSCH, CEO, Mittal Steel USA:

Weirton has been kind of beating the odds for more than 20 years. I think the main focus at the moment has to be on other ways that we can make this more competitive. I know they are work on a program to try to achieve higher levels of productivity. We'll certainly be looking at facility investments and so on. I don't think there are any guarantees in this marketplace. We have to do the best we can on the things that we control.

JEFFREY BROWN:

Overall today just 13 percent of workers have a traditional pension plan as their sole retirement, compared with about 60 percent in the late 1970s. And now even well off companies are making the change. In recent months Verizon, Lockheed Martin and Motorola have all announces freezes on their pensions plans.

JEFFREY BROWN:

And for more on what these pension changes might mean for U.S. workers and their companies, I am joined by: Karen Friedman, policy director for the Pension Rights Center, an employee and retiree advocacy group; and by James Klein, president of the American Benefits Council which considers pensions from the employers' point of view, and lists both IBM and Verizon as clients.

JEFFREY BROWN:

Karen Friedman, starting with you, what do you see as the significance of IBM, Verizon, some other big companies announcing these freezes?

KAREN FRIEDMAN:

Well, it's certainly a dangerous precedent. Here you have two profitable companies that are announcing that they are freezing pensions; and we've heard over the last two weeks since Verizon first froze its plan from hundreds of workers who are saying things to us like this is a devastating situation. We feel like we've been kicked in the stomach. We feel like it is a death in the family — because these workers had an expectation and they feel that expectation is broken. They feel betrayed by the company.

Here are people who worked years and years for these companies with the expectations of getting a full pension based on all the years of work, and based on final pay, and suddenly the company is pulling the rug out from under them. They are getting much, for older workers in particular, they are going to end up with thousands and thousands of dollars less than they expected. And they say to us, what are we supposed to do — this is really unfair.

JEFFREY BROWN:

Well, Mr. Klein, why are companies doing it? We've grown used to hearing some companies that are in bankruptcy for having trouble with their underfunded pensions. These are companies that are comparatively well off.

JAMES KLEIN:

Yeah, it's really not a new development. Back in 1994 there were about 58,000 of these traditional kind of defined benefit pension plans that your segment talked about. Ten years later there were only half that number in this country — 29,000 — and the number has dwindled since then and many, many more who are freezing their plans, not doing away with the plan all together but doing what IBM has done and Verizon has done.

So really that is the much more significant phenomenon that has been going on here in the country for some years. Not what has gotten a lot of attention over the last couple of years, which are also the, what was, identified in the setup piece in terms of a few very severely underfunded plans that pose a risk of terminating and dumping their liabilities on the system. And in those instances, unlike in the IBM situation or other kinds of freezes of this nature, in those instances workers actually are getting less than they might have expected because there were insufficient assets. Here everybody gets what they were promised.

JEFFREY BROWN:

But why is it happening? You didn't answer that? Why are companies moving to shift the risk from themselves to their employees?

JAMES KLEIN:

Well, part of it is a reflection of the changing nature of the employer, employee relationship and it is just one manifestation of that. Another aspect of it is it has become increasingly more difficult to sponsor these plans.

There is, I have a lot of member companies who tell us, you know, we sponsor a pension plan; we expect it to be a very expensive proposition. We don't have a problem with that. What we do have a problem with is the unpredictability of not knowing what the new rules are going to be with respect to funding and other things of that nature.

The other piece of it is just a matter of global competitiveness. IBM may be one of the only — if not the only company in its industry that ever even had a pension like this. So the fact that they held on to it for as long as they did was really quite remarkable.

KAREN FRIEDMAN:

From the point of view of employees, they look at this as just an out and out betrayal, especially IBM employees. IBM last year froze its plan for new workers. And they said at the time, you know, we're committed to our defined benefits system; we're committed to our defined benefit plan.

And now workers are calling us and saying, you know, the company isn't keeping its promises to us.

JEFFREY BROWN:

Do you think that the workers really think of this as a promise from the time they were hired until they retire?

KAREN FRIEDMAN:

We are getting letters from management employees. We just got a letter recently from a single mom who said to us that when she took the job, Verizon said you are not just getting wages from us, are you also getting a pension.

And there is an expectation that as long as they meet their end of the bargain, they do their work, their loyal to the company the company is healthy, that the company is going to meet their end of the bargain.

What's different about IBM and different about Verizon is these are leaders in their industries. These companies can well afford their pension plans. And workers really do feel like they are going to end up with much, much less. In fact, what is — Jim is right. People are going to get exactly what they earned as of the date of the freeze. But workers are going to end up losing thousands and thousands of dollars of expected benefits if the plan had continued.

And that's what people have stayed with the companies for. So you know, they're feeling like, especially with Verizon and IBM, these have been companies that should be leading the way to the top, not leading the race to the bottom.

JEFFREY BROWN:

Let me pick up on this, the promise —

JAMES KLEIN:

As Karen knows, one thing that she and I do agree on is the value of these defined benefit pension plans. We have been working certainly tirelessly to keep them alive.

At the same time, you know, I may have an expectation that I am going to get salary increases for each year that I work. But it isn't necessarily enshrined anywhere that that is going to happen. There are still are about half of the workers in this country who participate in no plan whatsoever.

And while I think it is certainly ideal if a company finds itself to be able to sponsor both one of these types of traditional plans as well as a 401(k) plan, they are designed to do different kinds of things, the realities of the business marketplace may not make it possible for some companies to continue to provide it.

The real issue is: How do we achieve retirement income security? And therefore we need to focus on ways to make sure that these 401(k) plans and other kinds of plans that have for years now been succeeding these defined benefit plans do an even more robust job of ensuring —

JEFFREY BROWN:

Actually that is something I wanted to go to, because I'm curious on the follow-up. You have companies telling us that they are moving towards 401(k). Partly they are giving their employees more ownership of our retirement. We have the responsibility to invest. Are employees doing that? Is the message getting through? Are companies training their employees well enough to do that?

JAMES KLEIN:

Not as much as we all would like to see it happen. On the other hand there are some positive movements afoot; there are efforts to try to ensure that people get more education and advice; there are things that are being done to try to import features of a traditional defined benefit pension plan into these retirement savings plans.

There is no question about it that the defined benefit plan offers certain security. But we shouldn't also overlook the fact that there are many moderate income individuals in this country who literally have become millionaires through participation in their 401(k) plans.

So you can have a less generous pension and a very favorable 401(k) plan. But you need, we need to have features in this country making it a criteria for graduating high school or college that will there be a certain level of financial literacy.

JEFFREY BROWN:

All right. Karen Friedman, what —

KAREN FRIEDMAN:

Well, let me respond to that in two different ways. First I want to go back to the whole situation of IBM. IBM is saying that we're freezing the plan but we're putting in this very generous 401(k) plan for our employees.

But I was just reading in the New York Times today, by an economist, there is no way that that new 401(k) plan is going to meet — make up for the expected losses that thousands and thousands of older employees of that company are going to be faced with.

And so while 401(k) plans are good as supplemental plans, they were never meant to be the whole plan that people used to save for retirement. So what we are seeing is over the last ten to twenty years a gradual move or gradual shift from these good traditional pensions that provide employer-paid benefits, that employ a guarantee stream of income to this do-it-yourself society.

Well, at the same time that's happening we are asking people to save more for their retirement, we are asking them to save for their education. We are asking them to save for health care. How much can individuals save? Right now just to put this into perspective, the median account balance of 401(k) plans in this country is $15,000. And the median account balance for those between 55 and 65 is only $23,000.

So while 401(k) plans are great as supplemental income plans, while we should be encouraging people to save, what we fear is that if we let these good traditional plans die, which we hope is not going to happen by the way, people are going be to be left without adequate income. So it is a huge social policy issue —

JEFFREY BROWN:

We just have 20 or 30 seconds.

JAMES KLEIN:

Karen, there shouldn't have to be a do-it-yourself approach. I think there is a shared responsibility among government, employers and individuals. People are going to have to rely more on their own wherewithal under the reality of the way that the system is changing. But there is a lot that can be done through public policy changes to help (a), make these 401(k) plans even more successful than they have been in terms of accumulating wealth, and (b) helping people make better decisions to the extent they will have to take on a greater responsibility.

JEFFREY BROWN:

OK. James Klein, Karen Friedman, thank you both very much.

KAREN FRIEDMAN:

Thank you.

JAMES KLEIN:

Thank you.