Fortunately, it looks like the tide may be turning away from this practice.  According to the Bureau of Labor Statistics report, an increased number of employers are allowing workers to select how they want their 401(k) matching contributions to be invested.  In 2000, the year before Enron’s failure, 65 percent of 401(k) plans allowed workers to select investments for their employer matching contributions.  By 2005 this number had increased to more than 75 percent of plans allowing workers to control their 401(k) investments.

As we’ve written before, traditional defined benefit pension plans are limited to 10 percent in employer stock, but there are no such limitations on 401(k) plans. The Pension Protection Act of 2006 allows workers to sell employer stock in their 401(k)s after three years, but more could be done.  Our policy agenda asks for a study of how to best limit company stock in 401(k)s.  The BLS report might be an encouraging sign that employers have learned a lesson from Enron, but too many workers are still putting their eggs voluntarily in one basket.

The Bureau of Labor Statistics report is available in the Reports section of our web site.

As we’ve said in the past, nothing beats a guaranteed pension. These teachers have seen their retirement security plummet along with their 401(k)-type account balances. In the process they have realized that their retirement is more secure with a guaranteed pension than it is with a topsy-turvy stock market.

A recent article in Financial Week revealed a big surprise.  ExxonMobil has the most underfunded defined benefit pension plan of all the S&P 500 companies.  Yes, you read that correctly.  A company yielding record profits has neglected to adequately fund its pension plan. According to the article, the ExxonMobil pension plan was funded at just above 80 percent at the beginning of 2008.

Given the current status of the world’s financial markets, the plan’s funding level has most likely dropped along with the funding levels of most pension plans.  Other companies are struggling with financial hardships, making it extremely difficult to fully fund their pension plans.  But ExxonMobil isn’t like those other companies.  This year Exxon Mobil broke the record for the largest quarterly profit ever.

It is outrageous that the most profitable company in U.S. history had an underfunded pension plan.  Many companies are now strapped for cash because of the current economic crisis.  Companies struggling to stay in business have laid off thousands of workers and cut back benefits.  But ExxonMobil isn’t like those other companies.

ExxonMobil has subjected its workers and retirees to potential benefit cutbacks because of the pension plan’s funding status.  Restrictions required by the Pension Protection Act of 2006 take effect based on a plan’s underfunded percentage and start with pension plans that are less than 80 percent funded.

ExxonMobil, it is time to fully fund your pension plan and pay for the benefits your workers have earned.  There is no excuse for a company with record-breaking profits to have an underfunded pension plan.  ExxonMobil has been one of the most successful companies in recent history.  Great success brings great responsibility.

Freezing a traditional defined benefit pension (DB) and moving to a 401(k)-type defined contribution plan (DC) can increase costs to the employer/ taxpayer at exactly the wrong time, because:

(1) Maintaining two plans is more costly than operating just one;

(2) Foregoing and undermining the economic efficiencies of DB pensions drives up retirement plan costs; and

(3) Accounting rules can require pension costs to accelerate in the wake of a freeze.

Freezing a DB pension and moving to a DC plan can increase retirement insecurity, potentially damaging recruitment and retention efforts.

In the words of the authors: “Time and again, states that have carefully studied the issue have concluded that, even in tough economic times, continuing to provide retirement benefits via cost-effective DB plans meets the joint interests of fiscal responsibility for employers/taxpayers and retirement security for employees.”

The issue brief was written by Ilana Boivie and Beth Almeida of NIRS.

Last week General Motors announced plans to temporarily suspend the practice of making matching contributions to their employees’ 401(k) accounts.  This cut, coupled with the impact of the reeling stock market, only adds to the sense of retirement insecurity felt by workers who have seen the nation’s pension and 401(k) account balances plummet by as much as $2 trillion in the past year and a half.

Now, as the Washington Post points out, workers are increasingly finding that they will have to fend for themselves when it comes to their retirement security.

It is worth noting that when GM announced in 2006 its decision to break its pension promise to salaried employees by freezing its traditional pension, it did so with the promise of making matching contributions to workers’ 401(k) accounts.  Now the company has broken this promise, too. This news comes on top of GM’s July announcement that it is cutting health benefits for all salaried retirees over the age of 65.

Sure, GM is struggling financially, but the company will probably not be the only one to break its retirement promises to workers.  Watson Wyatt estimates that out of the 248 companies they surveyed, 2 percent of these companies have reduced their 401(k) or 403(b) matching contributions this year and 4 percent plan to do so in the next 12 months.

It will be interesting to see how many of the companies planning to reduce or eliminate matching contributions will reinstate their contributions once the economic crisis is over.

For workers who, like me, are relatively young and decades away from retiring, the current economic crisis doesn’t make me terribly anxious about my 401(k).  While the economic downturn concerns me, I’m not too worried because I have ample time to prepare for retirement.  But I do admit that even I am too afraid to look at the balance in my 401(k) account!

But what about people who are closer to retirement age?  They have fewer years to make up the money their 401(k) accounts have lost in this volatile stock market.  Imagine being only a few years from retirement and losing a big chunk of your expected retirement income because of the current crisis.

One person I’m not worried about is my mom.  She’s one of the 44 million private-sector workers and retirees lucky enough to have a traditional pension.  She, unlike me, doesn’t have to rely completely on the unpredictable stock market for her retirement security.  She is lucky enough to have worked all her life for an employer who made and kept its pension promise to her.

You may be wondering what’s so great about a traditional pension.  Well, traditional pensions promise workers a set income for life and income for a worker’s spouse in case of the worker’s death.  They’re guaranteed.  And when they retire, workers can’t outlive the income they receive from pensions the way they can with 401(k) plans.

In addition, guaranteed pensions are part of the three-legged stool of retirement security, which consists of Social Security, personal savings and employer-provided pensions.  The income retirees receive from pensions helps keep them out of poverty and has helped our nation build its middle class.

That’s why I’m not worried about my mom’s financial security in retirement.  Her pension will take care of her post-retirement needs.  It’s those workers and retirees without the security of guaranteed pensions that I’m worried about.

Question is, in light of the current turmoil in the financial markets, should Wall Street manage any of our long-term retirement savings funds? Is the 401(k) plan, which has become the main retirement savings vehicle for the American worker over the past three decades, a mistake? The case for rethinking the 401(k) as a pillar of retirement savings is compelling.

Farrell makes several good points that show up the weaknesses of relying too heavily on 401(k) plans — including the average worker’s inability to save enough or to make the right  investment decisions to earn high enough returns; the exorbitant fees charged by 401(k) providers; and investment advisers’ conflicts of interest.  He hints at an interesting  alternative:  “annuity-like products that would guarantee workers a steady, inflation-protected income during their golden years but would be less expensive for companies to offer than the traditional defined-benefit pension fund.”

I can’t say that we agree with all of what Farrell says, but it’s an interesting read.   Check it out.

By the way, whatever an “academic quant jock” is, I want to meet one!

What a week.  The Lehman Brothers bankruptcy, Merrill Lynch’s sale to Bank of America, and the government rescue of AIG were just the latest upheavals in this churning Subprime Summer.  I’ve been getting calls every day from reporters, wanting to interview people who are concerned about their 401(k) accounts.

People are right to be concerned.  For many American workers, a 401(k) account will be their only source of retirement income besides Social Security.  While one should expect market fluctuations to affect their account balances, no one likes to see their 401(k) take a nosedive.

All of this shows the importance of guaranteed pensions. While not perfect, traditional defined benefit (DB) pensions have many virtues that seem more and more appealing in today’s economic climate.  Traditional pensions are better insulated against the volatility of the stock market than 401(k)s, because they hold more money, and that money is invested collectively over long periods of time.  And they are professionally managed and diversified, according to prudent investment standards (including limiting investments in employer stock, as Joellen pointed out yesterday).

Most importantly, private pension plans are insured by the PBGC, so if your company goes belly-up and it can’t meet its pension obligations, most workers will still get their full pension.

Now I’m not saying we should get rid of 401(k)s, but we must recognize that do-it-yourself savings plans are not providing enough retirement income for most people.  As more companies freeze their traditional pension plans, we need to look at the features of DB plans that work well and figure out ways to keep those features in our retirement system.  To find out more about the differences between DB plans and 401(k)-type plans, check out the Defined Benefit vs. Defined Contribution Plans reports in the Reports section of our web site.

The good news for these employees is that the money in their pension and 401(k) plans is protected from creditors, so that even when a company goes into bankruptcy, they don’t have to worry about their retirement money being used to pay back debts instead.

Furthermore, if you’re worried about the value of your company’s pension plan because it may contain too much of your own company’s stock, a little-known provision of the Employee Retirement Income Security Act of 1974 (ERISA) prevents companies from investing more than 10 percent of plan assets in their own stock.  So, if you were a participant in the Lehman Brothers defined benefit pension plan, ERISA protects you from a potentially catastrophic Enron-like loss of your retirement funds.

Unfortunately, the same protections aren’t in place for your 401(k) and other defined contribution plans so if your money is invested in your company’s stock, it isn’t as safe.  But, a provision of the 2006 Pension Protection Act allows participants who have worked at their company for three or more years to shift investments out of employer stock and into other investments offered by the plan.

Generally, the Pension Rights Center doesn’t like to give out investment advice, but even a novice knows that it isn’t a good idea to put all of your eggs in one basket.

Happy 34^th Birthday, ERISA!

Today marks the 34^th anniversary of the date that the Employee Retirement Income Security Act of 1974, known to those in the field of pensions as ERISA, was signed into law.  In a tribute to the workers who would be helped by the new law, that day, September 2, 1974, fell on Labor Day.

ERISA’s enactment was brought about in part by the devastating “Studebaker” incident, which left thousands of employees without the pensions they had been promised.  When Studebaker, at the time one of the nation’s largest car manufacturers, closed its Indiana plant in 1963, it left an underfunded pension behind and some workers ended up receiving as little as 15 percent of the pension they had been promised.  When he signed ERISA into law, President Gerald Ford said that with ERISA, “the men and women of our labor force will have much more clearly defined rights to pension funds and greater assurances that retirement dollars will be there when they are needed.”

Indeed ERISA has achieved many improved protections for workers.  Before ERISA, companies could require employees to stay with the company for 25 or more years to earn the right to a pension benefit. With ERISA that requirement shrank to 10 years.  When a company like Studebaker failed prior to ERISA’s enactment, pensions of thousands of workers were lost because there was no federal pension insurance program to protect their hard-earned benefits.

Pensions were important in 1974 for the same reasons they are important today.  Along the way improvements have been made, including some that allow workers to earn pensions after 5 or fewer years, protect women, and tell employees about the benefits they have earned.

But there is still a great deal of work to be done.  Too many employers offer no retirement plan coverage to their employees.  Workers with plans often encounter obstacles in enforcing their retirement rights, more protections are needed for women, and people are not informed about the fees they pay for their retirement savings accounts. To make matters worse, a growing number of companies are freezing their pension plans and breaking promises to their employees.

Happy Birthday, ERISA.  You’ve done a lot to protect the retirement security of American workers, but there is still important work to do.

Care to learn more about the history of ERISA?  Read The Employee Retirement Income Security Act of 1974: A Political History by James A. Wooten.