If CFOs Are Worried About Benefit Costs, Why Are They Leaving Avoidable Pension Costs on the Table?

This morning's lead article in the Wall Street Journal's CFO Journal says that CFOs are concerned about benefit costs. This was not at all surprising to me. What is surprising though is how much they are leaving on the table relative to defined benefit pension plans, often frozen legacy plans.

Let's start out with some background. 40 years ago, most large companies in the US provided defined benefit (DB) pensions for large parts of their workforce. This was, of course, before the 401(k) gave us the perhaps misguided self-sufficiency explosion. Over time, many of those employers froze those DB plans (meaning no new participants and those in the plan get no further accruals) and some terminated them. But, there remain a lot of frozen DB plans that remain in what some call hibernation. I call it lingering death.

That lingering death seems to go on interminably. And, there are reasons that happens. Freeze the plan and it becomes out of sight, out of mind. Not to overdo the cliches, but they go into a set it and forget it mode.

But, set it and forget it with a legacy pension may not work so well. Research by October Three has shown that many of these plans have what might be termed overhead or frictional costs exceeding 1% of plan assets. That means that for a not atypical frozen plan that the long-term cost of that plan -- unless the sponsor is willing to fund it sufficiently to terminate it may be 10-15% higher than if those frictional costs were entirely eliminated. (Understand that it is impossible to eliminate all of those frictional costs, but most can often be eliminated.)

How does this happen? Nobody is paying attention. There's nobody on staff focused on efficiency in that frozen plan. The last person doing that went away a few months after the plan was frozen. So, now, a typical company with a, for example, $50 million frozen plan may be spending more than half a million dollars per year on that plan unnecessarily. 

Suppose the company assigned one professional to that plan. Suppose they made that plan half of that person's responsibility, at least until the plan is terminated. And, suppose they pay that person $200,000 per year. Let's add in another 25% for additional employment costs and we're up to $250,000. Then, this company is eliminating more costs than it is incurring and in doing so, they are getting rid of perhaps an unnecessary headache.

The last obstacle is figuring out what this person should focus on. And, since they probably have not been focused on pensions, they may not know. However, there is a good chance that they are paying a lot of money for consulting that is not focused on their needs. Or, the consulting might be excellent, but the company's lack of focus causes them to ignore it.

Either way, this is something to consider and if they're not sure, I know someone who can guide them down the right path.

Coronavirus Crisis as Catalyst: Change the Way You Look at Your Rewards Structure

I saw these words this morning: "Your brain isn't resistant to change; it is lazy." Can we extend that? Is your corporate rewards program -- the way that you reward your employees for working for you -- resistant to change? Or is that change somehow always on the back burner?

You've looked at the survey data. You've heard the cries for help from employees. But, your rewards program remains right down the middle.

Perhaps you've tried some innovative ways to become an employer of choice. You put the ping pong table and beer keg in the break room. Alas, it didn't reduce turnover. It didn't make your employees happier (except when they hit the beer keg too often). It didn't reduce their real stresses even if it did mask them for a few minutes.

But, the crisis caused by the coronavirus pandemic has forced you to change the entire compact between you and your employees. They've forgotten their office space. The fancy espresso maker you provided them sits idly as they become reaccustomed to the coffee they make quickly in their own home. At the same time, they've likely created their own custom background for their Zoom calls. All of this, they have managed. In fact, if you've kept them employed and had to cut their pay a little bit, most of them have probably managed how to live on a little less.

What they haven't learned though is how to feel secure. They haven't figured out how they are going to deal with a health catastrophe or disability, but maybe the federal government will come to the rescue. Where the federal government has not promised to come to the resuce, even in the most grandiose of campaign speeches is in helping your employees to retire.

You remember retirement. It's what your parents did. Either or both of them worked for a company for a long time. They retired with a pension. Supplemented by Social Security and perhaps some savings, somewhere in their early to mid-60s, they stopped the daily grind and pursued all the hobbies that had been given short shrift while they were working. It was part of the "American Dream."

Not for you? You can't even dream of it?

Look back at what I said a few paragraphs ago. Most of them have probably managed to live on a little less.

Let's do some oversimplified math to figure out how we are going to use this to become an employer of choice again. Consider Taylor, a good employee.

Pre-coronavirus, your basic costs for Taylor included:

• Base pay: 100,000
• Health benefits: 25,000
• Other non-retirement benefits: 5,000
• Retirement benefits: 4,000
• Total: 134,000

With coronavirus, you've had to cut Taylor's pay by $10,000. So, the equation now looks like this:

• Base pay: 90,000
• Health benefits: 25,000
• Other non-retirement benefits: 4,800 (a couple of benefits had a pay-related component)
• Retirement benefits: 3,600
• Total: 123,400

At some point, this crisis will end. And, during the crisis, Taylor may have learned to live on $90,000 instead of $100,000. She would love to get that full $10,000 back, but since she has learned to live on it, that's not what's keeping her up at night. 

During her new social distancing life, Taylor has taken to ever family search website she can find: 23 and Me, Ancestry, MyHeritage, and more. She's learned that going back four generations, the women in her family are long-lived. That's great news for Taylor, right?

Not really. As the she saw the stock market fall and her bank decrease the interest rate on her savings account to 0.01%, Taylor wondered how she can ever afford to retire. After all, she guesses, based on her genealogical research that she will probably live to be about 95. And, after she retires at age 62 (she learned she can start collecting Social Security then), that leaves her with a 33-year retirement. She's going to have to pay for it somehow.

As her employer, you can be the solution to her problem and be an employer of choice. After all, you don't want to lose a great employee like Taylor. And, you've committed that you are willing to spend $134,000 on her total rewards.

Before we do that, let's think about what Taylor is not good at. Like many in her age group and yours and mine and everybody else's, she's not good at financial planning. What you can do to help is to create a nest egg for her. And, don't do it so that some day, she gets a pot of cash from the company, give her lifetime income.

So, let's reconfigure the $134,000.

• Base pay: 95,000 (she learned to live on 90,000)
• Health benfits: 25,000
• Other non-retirement benefits: 4,900
• 401(k): 3,800
• Subtotal: 128,700

You have $5,300 left to spend. That's 5.5% of pay. 

I don't care what you call it, but now is the time to call it something. Take that 5.5% of pay and allocate it to Taylor's lifetime income. Sell it to your employees until you can't sell it anymore. Tell them you are giving them this plan because you want them for their careers. And, tell them you are giving it to them because some day, you want them to be able to gracefully exit their careers and to do so without fear of outliving that little 401(k) nest egg that isn't worth what it was before coronavirus hit.

Once they get that benefit, your best employees won't leave.

Make the best of the coronavirus crisis. Let it be a catalyst for a great change.

Coronavirus and Your Retirement Prospects

If you're like most Americans, you probably plan to retire one of these days. If you're not in that category, you may be retired already. Assuming that you fall into that first group, I want to talk to you a little bit about how this pandemic is affecting you.

If you're like 10-20% of the workforce, you have lost your job, been furloughed, or had your work hours cut back. Even among the rest of the population, many of you will have trouble meeting your performance goals for the year. In any case, this is not shaping up to be a good year for retirement savings.

Despite the great performance in the last week or so, equity markets are down nearly 25% for the year. At the same time, prevailing interest rates are at or near historic lows. What that means to someone who had planned to retire in 2020 is that your ability to purchase lifetime income protection has declined.

How does that work? The higher the prevailing interest rates, the more money you or an insurer can earn on investments and therefore, the larger your lifetime income protection. So, while bond returns (investments in bonds) have been good in 2020, your falling portfolio balances combined with no place to get good and safe returns is a point of pain for people considering retirement.

How about those of you whose jobs have disappeared whether that be temporary or permanent? Your 401(k) deferrals have ceased. That means that you're not getting matching contributions either. And, you may be taking advantage of the relaxed rules in the CARES Act on hardship withdrawals or plan loans. But, where are those amounts coming from? Your retirement nest egg is being eaten up by the effects of the pandemic. Wasn't it intended for retirement? Oops, something got in the way.

As a consultant, I am hearing from real-world companies that they are looking for ways to cut back, at least for 2020, their expenditures on retirement benefits. Who does that decrease in expenditure affect? You, of course, and not in a good way.

Yes, this is filled with bad news. I can't sugar coat it. If your future retirement is dependent on a 401(k) plan (plus Social Security), you've been hit hard. And, you may be hearing it here first, but if your employer temporarily reduces the amount it is spending on your retirement benefits, that reduction may not be temporary.

Surely, not everyone is being hit that hard. Surely, there are employees who are faring just fine with respect to their retirement prospects as this pandemic wreaks havoc on the rest of them. But, is there a way we can label them?

There is. They are all participants in defined benefit plans. That means that their employers have made a commitment to them to provide lifetime income in the form of a pension. For those people, if they remain employed, they have that securiry. For them, their 401(k) is supplemental savings. Most of them are going to be just fine.

Yes, I know all of the stigma around pension plans. They're expensive ... well, they're only as expensive as the benefit they provide. They're volatile ... they don't have to be. They're a dinosaur ... only because people say they are.

But, employees in defined benefit plans have one giant reason to sleep better at night than those relying on their 401(k) only. They will get a pension.

So, when the dust settles from the pandemic, and it will, many companies will be looking to hire as people scramble to either return to their old jobs or to find new ones, where will you be?

Here's my little nugget: take the time now whether you are employed or looking. See which companies are providing ongoing pension plans. Check them out. They are likely employers of choice.

And, to companies trying to figure out how they will restock their workforces when the time comes, be that employer of choice. Be better thant the rest and offer a pension.