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

But moving executive pension obligations into the regular pension plans can not only use up the surplus assets, it can put a dent in the rest of the pension assets as well. Today, many pension plans with special executive carve-outs are underfunded, including Carpenter Technology Corp., Parker Hannifin, Illinois Tool Works (which manufactures industrial machinery), PMI Group (a mortgage insurer), ITC Holdings, and Johnson Controls.

TERMINATORS

When it comes to siphoning pension assets, nothing beats terminating the piggy bank and grabbing the entire surplus at once.

This maneuver was common. In the 1980s, employers terminated more than two thousand overfunded pension plans covering over two million participants and snatched surplus assets in excess of $20 billion. Some were inside jobs. Occidental Petroleum terminated its pension in 1983 and paid no income tax on the $400 million in surplus it captured because the company had net losses that year.

Other pension plans fell victim to pension raiders like financier Ronald Perelman, who took over Revlon in 1985, killed the pension plan, and nabbed more than $100 million in surplus pension assets, and Charles Hurwitz, who took over Pacific Lumber, closed down its pension and used $55 million in surplus pension assets to help pay off the debt he took on with the leveraged buyout. To stop these abuses, Congress slapped a 50 percent excise tax on “reversions” in 1990, and pension terminations at large companies slowed almost to a halt. But there was a huge loophole (there always is): A company that terminated its pension could avoid the onerous 50 percent excise tax—and pay only 20 percent—if it put one-quarter of the plan’s surplus into a “replacement plan.” A replacement plan could be another pension. Or it could be a 401(k). The only restriction was that companies allocate the surplus into employee accounts within seven years.

Montgomery Ward was a big beneficiary of this loophole. The stodgy retailer, struggling to compete with low-cost giants like Kmart and Wal-Mart, filed for bankruptcy protection in 1997. Its $1.1 billion pension plan was especially fat, because two years before its bankruptcy filing, Montgomery Ward cut the pension benefits by changing to a less generous plan. This reduced the obligations, and thus increased the surplus.

The company then terminated the pension plan and put 25 percent of the $270 million surplus into a replacement 401(k) plan. It paid the 20 percent excise tax, and the remaining $173 million of the surplus went to Ward income-tax-free, because the company had net operating losses. Ward used the money to pay creditors—the largest of which was the GE Capital unit of General Electric. It emerged from bankruptcy in 1999 as a wholly owned subsidiary of GE Capital, its largest shareholder.

The employees didn’t have much time to build up their 401(k) savings: The company went out of business in early 2001, closed its 250 stores, and laid off 37,000 employees. What about the 20 percent of surplus assets set aside to contribute to employee accounts? The $60 million or so that hadn’t yet been allocated to employee accounts went to creditors, not employees. Creditors have often ended up with the pension surplus. Around the time Montgomery Ward was fattening its plan for slaughter, Edison Brothers Stores, a St. Louis retailer whose chains included Harry’s Big & Tall Stores, entered Chapter 11. It killed the overfunded pension plan in 1997 and set up a 401(k). After paying the 20 percent excise tax, Edison Brothers forked more than $41 million in pension money over to creditors and emerged from bankruptcy. Its employees had even less time to build a nest egg in their new 401(k): The company liquidated in 1998.

These strategies ought to make it clear that many companies were terminating pension plans not because the pensions were underfunded or a costly burden, but because the pension plans were fat and the companies themselves were in financial trouble. The icing on the cake was that a company with losses would pay no income tax on the surplus assets.

It also puts a less savory spin on the origin story of the 401(k): Companies like Enron, Occidental Petroleum, Mercantile Stores, and Montgomery Ward didn’t adopt 401(k)s because they were modern savings plans employees were supposedly lusting after; their 401(k)s were merely the bastard stepchildren of dead pensions.

BLACK BOX