(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.