Last night, 60 Minutes, the CBS News Magazine had a piece on the 401k Plans and how many people have lost much of their life’s savings.

The piece was slanted to show 401 (k)s as being the problem.  To give credit, 60 Minutes did interview a 401k industry supporter who clearly stated it was not the 401 (k)s but the economy and the decisions that had been made.  It also did point out many fees that most investors are not aware of and in doing put them on notice.

The part that irked me was the interview of Brooks Hamilton, a pension planning consultant.  He said, “401(k)s turned out to be so much cheaper than funding pensions, that many companies decided to freeze their pension plans and replace them with 401(k)s.”  The clear implication was that Corporations dropped the “more expensive” defined benefit plans in favor of 401 (k) plans for money, period.  Also clearly implied was that Companies care only about profits and don’t think about employees.  

That is less than half the story and is extremely misleading.   The other half is the series of events that caused Companies to move away from the old-style “defined benefit” pension plans.  The fact that the plans were cheaper was one factor, of many, behind the move to 401 (k) plans.

Much more important was the liability issue.  Some history:  Until 1978 with the restatement of ERISA (The Employee Retirement Security Act), most companies offered Defined Benefit Plans.  Defined Benefit Plans were created such that an individual employee was guaranteed a certain pension amount for life based on a number of factors like pay rates, years of service, etc.  To guarantee this payment, Companies had to hire an Actuary each year to do a complete review of the plan and its assets and liabilities.  If a company did conduct an annual actuary review and if they invested in anything other than highly risky investments, the Board and the Officers had no personal liability.  In fact, most companies paid the PBGC (Pension Benefit Guarantee Corporation) to protect the pensions of their employees.  The avoidance of personal liability changed over through the mid ’80s and ’90s.  Increasing plaintiff activity and changes to the rules and  laws by Congress, the SEC and FASB made it increasingly more dangerous for a company to have a defined benefit plan.  The 401 (k) turned all investment decisions over to the employees and thereby eliminated most of the personal liability so feared by corporate officers and directors.  

On top of the increased liability, corporate officers and directors were faced with a huge financial hit when interest rates dropped in the early 2000s.  According to FASB Rule 87, the funding of liabilities for Defined Benefit Plans was tied to the average of the past 4 years of  Treasury Bond Rates.  As rates dropped from 7% or 8% to 2% or 3%, the companies had to double and triple the amounts held to cover pensions.  Simply put, if it took $5 million to cover $350,000 in pension payouts for a year at 7%, the number the company had to put aside went to over $11 million at 3%.  That hit the balance sheets and took profits from everyone.  Investors who expected a dividend could kiss them good-bye.  One solution was to convert to a 401 (k) plan.

The fact is that lots of people have lost a lot of money in the market.  How a 401 (k) has performed is more dependent upon the decisions of the owner than on fees or decisions made by the Companie who offered the 401 (k)s.  Those 401 (k) owners who chose the guaranteed low percentage return lost nothing.  Those who chose Mutual Funds with large foreign investments lost 60% or more of their money.  To blame the companies for the poor financial decisions of 401 (k) owners is poor judgment and editorializing on the part of 60 Minutes.  Most of the “reporters” on that show are old enough to know better.  Maybe they are just trying to justify their own losses which were due to their own poor investment decisions (they would call it ‘greed’ if it were done by a Corporate entity).

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