(FYI Joanna B)
New York Times, January 20, 2002
EXIT STRATEGIES
The Rich Are Different. They Know When to Leave
By LOUIS UCHITELLE
BUSINESS booms are famous for
hiding underlying problems in an
economy. It takes a recession to make them
obvious. Now, like melting snow, this
recession is uncovering a glaring inequality in
the system the United States has gradually
adopted over the last 20 years to prepare its
workers for retirement.
The Enron Corporation is the showcase. Its
top executives are walking away with money
in their pockets for their own retirement,
while their employees have watched their
pension savings disappear because Enron's
stock price plunged.
But Enron is not the only place where
inequality exists. With much less fanfare —
and in the absence of corporate misbehavior
— top executives at other big companies
have been similarly insulated from the losses that recession and reversal are
imposing on their workers.
In the 1980's and 90's, millions of workers were persuaded that when they
invested in stock plans for their retirement, they were gaining access to the
same rising market that has traditionally benefited the wealthy. It seemed a
way to make access to retirement security more equitable. But when prices
fell, lower-income people began suffering in ways that higher-income people
have not, because top executives have better information, more diversified
ways to save and, above all, company-funded pension plans that are less and
less available to ordinary workers.
In other words, workers gained an ability to profit from a stock market
boom alongside the wealthy, but not an equivalent ability to withstand a
downturn. "What we are seeing is a retirement safety net for top executives,
whereas ordinary workers, in the name of freedom to manage their own
investments, are left without a safety net," said Michael Sandel, a Harvard
political scientist. "Worse than paradoxical, is there not something unfair in
such a system?"
That question is only beginning to surface as workers experience the
downside of investing their retirement savings in their employer's stock. They
were happy to do so while stock prices surged in the 1990's, when they
bought into an increasingly popular view pushed by the Clinton administration
and by many corporate leaders. That way of thinking held that a
well-informed worker, free to invest his or her own savings, would reach age
65 with a larger pension than the company could provide by financing a
fixed-payment retirement plan. The same reasoning played a role in the
movement — now dormant — to privatize Social Security.
Pat Cleary, a vice president at the National Association of Manufacturers, a
lobbying group, puts the argument for such plans succinctly: "There are a lot
of millionaires out there at all levels, white and blue collar, who became
millionaires by investing in their own companies' stocks. We would not want
to discourage that."
Few were discouraged as long as stock prices rose. The percentage of
workers who depended on 401(k) style savings plans rose to 27 percent in
the late 1990's from 16 percent in 1989, while the percentage who relied on
company-funded pension plans fell to 7 percent from 15 percent. And the
amounts that people invested in their employer's stock also rose, reaching 19
percent of the nearly $2 trillion held in 401(k) plans.
Now the recession, and the Enron crisis, are shaking people up, particularly
those earning less than $60,000 a year, who make up more than half the
work force. Their 401(k) contributions represent virtually their entire savings,
pension experts say. And at many companies the portions invested in the
employer's stock are disappearing.
At Enron, 15,000 workers have lost $1.3 billion of the $2.1 billion that was
in the company's 401(k) plan a year ago.
IN addition, tens of thousands of workers at other big companies — Lucent,
for example, General Electric, McDonald's, Coca-Cola — have held their
collective breath as these companies' stock prices fell by more than 20
percent in the last year. All four, like Enron, have 401(k) plans heavily
invested in their own stock.
But officers at the top of these companies have much more room to
maneuver. "The reason that highly compensated top executives do not get hit
like ordinary people," said Annika Sunden of the Center for Retirement
Research at Boston College, "is that the highly compensated are also highly
diversified, much more diversified than the middle income employee who is
encouraged by his employer to own the company's stock. And they are
much less dependent than the ordinary worker on a pension as the source of
retirement income."
Pearl Meyer, president of Pearl Meyer & Partners, an executive
compensation consulting firm, maps the world of top executives. For one
thing, she says, they know before their employees do when their company is
in trouble. They can sell big portions of their stock holdings before the
trouble becomes public and the stock price plunges, as Enron's did, falling in
a few weeks from more than $30 a share to less than $1 before it was
removed from the New York Stock Exchange last week. Getting out ahead
of the tidal wave is one way to describe the actions of Kenneth L. Lay,
Enron's chairman, and other top Enron executives.
BUT even if the executives of a suffering company sell none of their shares
on insider knowledge, they have other ways to cushion themselves for
retirement. These executives, Ms. Meyer says, receive 67 percent of their
compensation in the form of company stock. So they are at risk. But the total
compensation is $10 million a year for the average top executive at the 200
big companies she studied. So more than $3 million still comes to each in
cash, and that means the executive can diversify investments far more than
the ordinary worker can.
Financial advisers, paid for by the company, help the top executive diversify
and get into sophisticated investments. Most have also built up $5 million to
$10 million in real estate investments, usually in the form of two or more
expensive homes, Ms. Meyer said. And the riskier the business an executive
runs, the more conservative he or she tends to be in making outside
investments. "I find that executives in the most volatile industries buy bonds,"
Ms. Meyer said.
If all else fails, the top executive has a safety net — the same
company-funded pension that ordinary employees are gradually losing as
companies shift them to 401(k)-style contribution plans, which require
workers to make payroll contributions. Companies frequently match part of
the employee's contribution, often with company stock that can't be quickly
sold.
The company-funded pension plans for top executives are cash, not stock
arrangements requiring a contribution from executives. Not only top
executives get them, but many managers earning upward of $200,000 a
year, Ms. Meyer says. The retirement payout ranges from 60 percent of an
executive's pre-retirement pay after 30 years down to 25 percent for an
executive with 15 years. The pension payments are in cash.
Richard A. McGinn was on the very high end of this spectrum when he was
ousted as Lucent's chief executive in 2000 at age 52 and began to receive a
pension of $870,000 a year, not far below his final year's salary. That was
the year that Lucent's stock fell to $15 from $77 (it is now below $10). The
stock plunge shrank the savings of thousands of Lucent workers who had
built up $11 billion in the company's 401(k) plan, 17 percent of it in
company stock. The 401(k) has been gradually overshadowing a
company-financed pension plan for employees.
What Lucent's experience reflects "is a broader shift in our society away
from a willingness to share the consequences of bad times, toward making
individuals face the risks of economic downturns on their own," Mr. Sandel,
the Harvard political scientist, said.
With Enron spotlighting the consequences, the National Association of
Manufacturers is reviewing its views — and so far sticking with them, Mr.
Cleary said. Anything that encourages personal savings is good for the
economy, he argues. More directly, when employees have savings in
company stock they are more loyal, more committed to their work, more
likely to raise product quality. And using stock rather than cash to match
employee contributions to 401(k) plans is often the least expensive route for
a company.
Mr. Cleary says companies are telling him, "Let's not foul all the 401(k) plans
that are working because one went wrong."
BUT apart from how well these plans might be made to work — perhaps
through a law limiting the amount of a company's own stock in its 401(k)
plan — there is another, more basic, criticism of the shift toward requiring
people to save for their own retirement. Given that most households have
less than $60,000 a year in income, their savings in 401(k) plans average
only $20,000.
That is far from enough to pay for retirement beyond what comes from
Social Security, says Karen Ferguson, director of the Pension Rights Center.
She would require employers to contribute much more than their workers to
401(k) plans.
There lies the road back to company-funded pension plans.