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Central Pension Fund The National Retirement Savings Summit Confuses Savings With Real Pensions On June 4 and 5, 1998 President Clinton and leaders of the U.S. Senate and House of Representatives convened the first National Summit on Retirement Savings in Washington D.C. Of the 250 assembled delegates Michael Fanning, Chief Executive Officer of the Central Pension Fund of the International Union of Operating Engineers and Participating Employers, was one of the few representatives of traditional defined-benefit pension plans. The vast majority of delegates represented the interests of corporate America and Wall Street. The Summit’s purpose was to explore ways to assist individuals in setting aside more personal savings for retirement. Personal savings constitute the third leg of what has traditionally been referred to as the “three-legged stool” of retirement security. The other two legs of the stool are social security benefits and employer-provided pension benefits. These three sources have historically provided adequate income for a secure retirement. Unfortunately, the message of the National Retirement Savings Summit was that workers will have to begin saving much more on their own for retirement, because employers are no longer willing to provide traditional pension plans. Instead, employers are providing only retirement accounts into which workers can put their own savings. These individual savings accounts are known as 401(k) plans. Both corporate America and Wall Street are enthusiastic supporters of 401(k) plans because they require no contributions by employers and they generate huge profits for Wall Street. Traditional defined-benefit plans, such as the Central Pension Fund, are funded by employer contributions and pay out monthly benefits for life. The assets are held in a common trust and invested through professional investment managers who charge institutional or wholesale management fees. For example, CPF’s assets are currently managed at a cost of just 15 basis points, which is 15 hundredths of one percent. In 401(k) plans employees must make contributions from their wages. Employers may, but are not required to, match a portion of employee contributions with company contributions. At retirement there is no guaranteed lifetime benefit, merely the payment of a lump sum that the employee must then make last for his or her lifetime. Finally, the employee is responsible for paying the investment management fees charged for managing his or her 401(k) account. In a 401(k) plan the employee will usually be offered several investment options from which to choose. Almost always these options are mutual funds. Mutual funds charge retail management fees for 401(k) accounts, usually from 100 to 300 basis points--1% to 3%--of the assets in the employee’s account every year! These are truly exorbitant fees compared to fees charged to traditional defined-benefit pension plans: 7 to 20 times higher. It is these exorbitant fees that make Wall Street so enthusiastic about converting the employer financed defined-benefit pension system into an employee financed 401(k) savings system. Recognizing the motivation of corporate America to rid itself of the cost of funding defined-benefit pension plans, and the motivation of Wall Street to obtain the exorbitant fees charged on 401(k) accounts, it is easy to understand why the National Summit on Retirement Savings focused almost exclusively on how corporations can assist workers in setting up their own individual 401(k) retirement accounts, instead of discussing how corporations can continue to provide defined-benefit pension plans for workers. Members of the International Union of Operating Engineers, whose Local Unions and employers participate in defined-benefit plans throughout the country, are fortunate to have the protection of traditional pension plans. It was clear at the National Retirement Savings Summit that non-union workers will increasingly be left with nothing but their own savings and social security to rely on for retirement. That is a two-legged stool that cannot stand. Originally
published in International Operating Engineer |