Dig Deep to Get the Real Deal on Retirement

By Kevin Sweeney
February 27, 2004 10:13 AM

Corporate scandals at such companies as Enron, WorldCom and Global Crossing have raised the bar for journalistic coverage of organizational administration of 401(k) and similar retirement plan vehicles.

Those assigned to report in this field must keep a keen eye for employers who place their own financial interests ahead of the financial futures of their work forces. The majority of organizations do offer an equitable retirement plan to provide security to their employees while enhancing their attraction and retention efforts. But carefully researching those companies with ulterior motives might land your story on the front page.

For example, preceding the Enron collapse, many articles and books placed the energy giant in a favorable light. Fortune Magazine named Enron the most innovative company in the nation for six straight years. Such coverage can shield potential corporate corruption.

Employees at both Enron and WorldCom lost over $1 billion in retirement savings after their respective employers' stocks plummeted. Global Crossing workers saw $450 million in stock disappear.

Enron workers received half the value of Enron shares for each dollar they contributed up to 6 percent of their overall compensation. Such an incentive resulted in total allocation of over 60 percent of company pension assets in Enron stock. Twenty-nine percent of employee assets in Global Crossing's 401(k) plan were distributed in that organization's stock.

Since the retirement meltdowns, many companies have discouraged placing a disproportionate amount of retirement funding in company stock. Many, in fact, have placed a cap on the percentage that can be allocated in their stock to promote diversification within a plan. But if an organization you are covering continues to allow a lopsided percentage, question the policy.

When companies release retirement information that seems to come up all roses, it might be time to dig deeper. The numbers may call for deeper investigation. In addition, executives unloading hundreds of shares of company stock within a short period of time should raise the red flag. Global Crossing executives sold a total of $3.1 billion in company stock in the three years prior to the meltdown.

Many organizations have specific trading policies that dictate the timing of a company stock sale. Ask about the governance associated with all workers, executives included, and the need to adhere to company policies.

Get down to retirement specifics

Your best sources for reporting on the retirement plans of the organizations you cover are likely the employees themselves. They stand to lose the most if their company files for Chapter 11 and, in the process, endangers future economic security. If a worker expresses concern over the retirement practices of his or her employer, it is worth following up. Failure to do so could be a major oversight.

In covering the retirement plan industry, I've noticed that companies love to flash high retirement participation levels in press releases. The translation: This organization's employees are secure because they are enrolled in our retirement plan. But participation numbers are only one component of full retirement growth potential.

"Participation is discussed in the media so much, but it's not tackling the issue" observes Liz Davidson, founder and CEO of Financial Finesse, an employee-consumer education firm based in San Francisco . "If you ask a human resources manager about the average balance or average contribution rate, they might not be so quick to answer."

A Deloitte survey indicates that the majority of employees save anywhere between 4 and 8 percent of their annual salaries. But pay close attention to the company match. Many workers will contribute a percentage of their salary equal to the company match, which in some cases can be as little as 2 percent. Four percent of the average worker's salary, even on a pre-tax basis, will provide little or no security when retirement approaches. It's important to look beyond company participation levels to get some hard numbers about how much is actually being saved.

To help guide workers through retirement planning and allocation, many companies are now in the advice business -- or at least have hired providers to offer such a service to their work force. Online outlets gather information about expected retirement age, current salary and risk tolerance in order to suggest an appropriate portfolio breakdown of fund families.

But keep in mind that these providers and vendors often have their own funds in mind when providing advice. Though there is usually a healthy selection, some include their own funds within portfolio breakdowns. When considering the advice included with a particular 401(k) plan, ask the employer about potential conflicts of interest.

Many workers feel they have a loyalty obligation to invest in their employer's stock. While such a guideline might not be found in any employee handbook, workers themselves might have been pushed in this direction. The International Society of Employee Benefit Specialists reports that 85 percent of human resources managers face retirement questions for which they have no authority to provide answers. If an employee was to receive any response from an HR manager, this could be construed as a violation of the Employee Retirement Income Security Act (ERISA).

Going a step beyond online advice, various players in the business of retirement have introduced what is termed "automatic rebalancing." Based on market returns, an individual's portfolio is automatically adjusted on a quarterly, semiannual or annual basis. When it comes to these advice vehicles, investigate documentation polices. Organizations have an obligation to document whatever advice they are giving in order to reduce legal liability associated with 401(k) plans.

Recent history indicates the retirement world is one that needs constant oversight and supervision. The warning signs are out there. Don't let them slip by in your coverage.

Please enter your friend's e-mail address

Please enter your e-mail address

If you would like to include a message, please add it here:

Copyright © 2008 Donald W. Reynolds National Center for Business Journalism