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

Another fallacy is that workers are more mobile. Younger workers are, indeed, more mobile—Bureau of Labor Statistics data show that they tend to change jobs seven times before they’re thirty-two. But pensions, including cash-balance plans, require five years on the job before one vests, so few younger, more-mobile workers remain in place long enough to collect a pension at all.

Older workers, by contrast, aren’t mobile at all (at least not voluntarily). As IBM and other employers were painfully aware, older workers tend to stay on the job until they lock in a bigger pension. That was the portion of the workforce IBM and other companies wanted to dislodge. Lump sums offered a twofold solution. For one thing, they were an enormous carrot to get people out the door. Companies knew that employees found lump sums irresistible. “Choosey Employees Choose Lump Sums!” was the title of one of Watson Wyatt’s surveys.

The carrot was especially effective when presented along with a stick: As part of their retirement “windows,” numerous companies told employees that if they agreed to leave now, they could take a pension as a lump sum. If not, they could take their chances and get laid off next year and have only the option of a monthly check in retirement. Another benefit of lump sums—from employers’ perspective—is that they shift longevity risk to retirees. Employers have been acutely aware that life spans are increasing, which explains why companies with a large percentage of women and white-collar professionals have been eager to provide lump sums.⁶ If the pension is based on a life expectancy of seventy-eight, then an engineer who lives to age ninety will have drawn a pension for roughly twelve years longer than the amount the lump sum would have been based on.

By contrast, coal miners and factory workers tend to have shorter life spans than the national average, so it’s no surprise that they are less likely to have a lump-sum option. General Motors, for instance, doesn’t allow most of its factory workers to take a lump-sum payout. But it does allow its white-collar workers to take a lump sum if they leave before retirement age.⁷

Government data show a strong correlation between longevity and payout options: Bureau of Labor statistics show that about one-third of blue-collar workers have a lump-sum option in their pension plans, while 60 percent of white-collar workers do.

This concept is understood by noncorporate pension managers as well: The Marine Engineers’ Beneficial Association, which covers ship engineers and deck officers, requires workers to take a medical exam before being eligible for a lump sum. Retirees in good health can take a lump sum, but those in poor health may not be allowed to.

Thus, despite all the talk about the burden of longer life spans, employers that pay out pensions in lump sums actually face none at all: The longevity risk has been passed on to the retirees.

TAKING THEIR LUMPS

Lumps sums provided employers with yet another benefit. Companies used them to secretly cut pensions even as people walked out the door. The mechanism was simple: If someone’s pension, converted to a lump sum, was worth $400,000, the employer could offer a lump sum worth, say, $350,000. How can this be legal, given anti-cutback rules?

Simple: Companies didn’t tell employees that the lump sum was worth less, and employees couldn’t tell. But as long as the employee chooses the lump sum—unknowingly cutting his own pension—the anti-cutback law hasn’t been violated. (A key reason the lump sums are smaller is that they might not include the value of any early-retirement subsidy, which can be worth 20 percent or more of the total value.)

Few employees would knowingly give up tens of thousands of dollars’ worth of pension, but unless employers provided apples-to-apples comparisons of the actual values of the monthly pension and the lump sum, there was no way to compare. In 1999, Mary Fletcher, a marketing services trainer and fourteen-year veteran of IBM, had to decide between taking a lump sum and a monthly pension when IBM sold a unit with three thousand U.S. employees to AT&T. She hired an adviser who calculated that while the monthly pension would be worth $101,000 if cashed out, the lump sum IBM offered Fletcher was worth only $71,500. Still, she took the lump sum. Almost all employees do, figuring they can invest the money and eventually end up with more. She was forty-seven and figured she was better off having nothing more to do with the IBM pension plan.