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Investor's Business Daily: "Company workers face facts: Days of defined benefits are retiring fast"

APRIL 2006

Retiring in the 21st century looks like a chilly proposition for some workers. Healthy firms like IBM, Verizon and Hewlett-Packard are joining the ranks of ailing companies such as United Airlines, General Motors and Bethlehem Steel in freezing traditional pension plans. It's the latest sign that once-sterling promises of company-funded retirement will continue to give way to plans that shift more risk to employees.

"Companies that still maintain (traditional pensions) are thinking seriously about terminating them. Unless things turn around rather dramatically, there's still bad news to come for defined-benefit plans," said Olivia Mitchell, executive director at the Pension Research Council at the Wharton School of the University of Pennsylvania. The result, many analysts say, will be less retirement security. Defined contributions will continue to replace defined benefits. According to the latest data from 2003, one in 10 pensions were affected by some type of freeze. That number is likely larger today.

After a freeze, many firms beef up their defined-contribution plans with higher contributions to 401(k)s. But defined-contribution plans tend to underperform defined-benefit plans. Plus, older workers will likely get squeezed the most since they have the least amount of time to build up enough savings to fill the gap left by a lower pension. If times get tougher, companies could cut 401(k) participation even more. As large firms cut benefits to keep costs down, some analysts expect employers across the country to follow their lead. The future of retirement will likely include hybrids -- a mix of defined benefits and 401(k)-type plans -- in addition to 401(k)s, 403(b)s and other plans.

"Defined benefit was what pensions meant in America. Now it's defined contribution. The overall coverage rate hasn't changed, but the kind of plans seem to be evolving," Mitchell said.

The shift, analysts point out, isn't exactly new. The number of defined-benefit plans has fallen by nearly 75% since the mid-1980 s, dropping from 114,396 to 31,238 by 2004, according to the Employee Benefit Research Institute. The EBRI notes that 61% of private-sector retirement assets are in defined-contribution plans compared with 39% in traditional pensions. Why the shift? Long-term changes in the work force are partly responsible. Defined-benefit plans work great when employees spend their entire careers at a company and base their pension payout on their last few high-earning years. But most workers switch job several times.

That makes traditional pensions less lucrative. Those plans worsened in the last five years. The stock market crash and low interest rates sent the amount of unfunded pension plans skyrocketing. The downturn hit just as the first wave of baby boomers started heading for retirement, sparking a funding crisis. U.S. pensions are underfunded by a staggering $450 billion, up from less than $100 billion a decade ago. Government safeguards designed to protect private pensions are also on shaky ground. In the 1970 s, firms began paying dues to the quasi-governmental Pension Benefits Guarantee Corp. in the event funding those plans became impossible. The system worked for a couple of decades. But massive bankruptcies, specifically in the airline and steel sectors, have pushed the PBGC $23 billion into the red. Hopes for a happy ending that won't have taxpayers footing pension payments look dashed.

The ending could get downright sad as baby boomers keep retiring. Possible legislation could shore up the PBGC, charging healthy firms more cash per worker to fund the agency's liabilities. Both the House and Senate have competing bills in the works. President Bush said in November he'd veto any bill that leaves the system worse off than it is today. Some analysts worry new laws could make freezes worse if firms opt out of traditional pensions in the face of tighter funding rules and higher payouts to the PBGC.

A survey of executives by Towers Perrin shows 60% of large firms would freeze part of their pension if it hurt cash flow; 32% already closed pension plans to new entrants. So the risk will likely continue to shift to workers, ready or not. Unlike traditional pensions, no one is required to invest in a 401(k), and millions don't.Karen Friedman of the Pension Rights Center points out that half of workers ages 45 to 64 have just $23,000 in their 401(k) accounts. "Traditional pension plans helped create a middle class in this country among retirees. If you abandon them, people will be left to live without adequate income," she said.