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

Lorenzo Walker, one of the warehouse workers at Hugo Boss, didn’t fit this stereotype. Walker, in his fifties, was earning only $6.50 an hour but still wanted to save some money for his retirement. He preferred an account like a 401(k), where his contributions would be withheld automatically from his paycheck, perhaps receive a matching contribution from his employer, and grow untaxed. His wife, a nail technician, had no retirement plan. Social Security was going to be the couple’s primary source of income, plus whatever Walker could squirrel away. He’d had a 401(k) at a prior job at a poultry-processing factory and had saved up about $11,000.

So one of the first things he asked when he started his job at Hugo Boss was whether the company had a retirement plan. The company said no. In fact, the company actually did have a 401(k) and the warehouse workers were shut out because their low incomes and savings rates would drag down the tax breaks of higher-income employees.

In 2006, the company agreed to let the employees’ union, Unite Here, set up a separate 401(k) for the warehouse and help run it. In exchange, the company would provide small matching contributions to their plans. The arrangement enabled the warehouse workers to have a 401(k) and receive company contributions, without affecting the Cleveland employees at all.

Many companies have these separate-but-unequal arrangements, with different 401(k)s for lower-paid and higher-income employees, who often get bigger company contributions. IRS rule 401(a)(5) says “a classification shall not be considered discriminatory merely because it is limited to salaries or clerical employees.” In plain English, a company can have a lousy plan covering clericals and a terrific plan for the professionals. “Cadillac plans versus ghetto plans” is what one lawyer called them.¹⁵

There’s another benefit to excluding low-paid workers from the retirement plans, or segregating them to less generous plans: It makes it easier for plans that executives participate in to pass another required discrimination test, called the “benefits” test. To prove it is nondiscriminatory, the plan must pay the low-paid participants, as a group, at least 70 percent of what the higher-paid get.

GERRYMANDERING

This is where the real creativity comes in. The tests don’t require employers to compare the benefits of individuals; they can compare ratios of the benefits received by groups of highly paid with those of groups of lower-paid employees. Benefits consultants developed software that enabled them to gerrymander employees into hypothetical groups. One might have only highly compensated employees, or HCEs, to use the technical lingo. Another might have only lower-paid employees. Still another group might include only executives and low-paid seasonal workers hired during the holiday.

The goal is to reduce the gap—albeit artificially—between the high-paid and low-paid in each group. To make the benefits of the low-paid, as a group, appear bigger, companies like CenturyTel count Social Security as part of employees’ pensions. Employers might also contribute a small amount to the savings plans of low-paid workers—which makes their percentage of benefits look higher. This helps the plan pass the test, and doesn’t cost the company anything, because the temp workers won’t stick around long enough to vest and forfeit the employer’s contribution.

This works with pensions as well. In 1999, for example, Royal & Sun Alliance Co., with the assistance of PricewaterhouseCoopers, amended its pension to award a small increase to one hundred employees. One employee got a pension increase of an additional $1.92 a month in retirement. This enabled the company to pass the discrimination tests and award eight officers and directors significantly more. The largest payment went to John Winterbauer, the sixty-year-old vice president of human resources, who got an additional $5,300 a month for life, paid out in a lump sum of $792,963.

PricewaterhouseCoopers, which pioneered many of these techniques, has used them on its own workforce. The accounting and benefits consulting giant provides its partners’ contributions to the 401(k) with a 200 percent matching contribution—putting in $2 for every $1 the partners contribute—but only 25 percent for lower-paid workers.

The plan passes the discrimination test in part because new employees joining the plan receive a 200 percent matching contribution in the first month of participation, which is always in December, which is also when the company tests the plan for discrimination. This practice has the effect of making the contributions to the lower-paid, as a group, appear higher, which helps the plan pass the test.

YOUNG AND VESTLESS