How are companies' retirement funds managed in the USA

Factual Questions
1

Reading the current GD thread about General Motor’s possible bankruptcy, I wondered what exactly is wrong with retirement benefits in the USA. It’s mentionned that if the company goes bankrupt, the former employees will lose their benefits. It’s also mentioned that the same thing happened to Polaroid’s employees. And it’s not the first time I read about similar issues.
So, what’s wrong exactly with these funds? How comes they evaporate when the company goes bankrupt?
The only explanations I can think of are the following :

-Funds are managed by the company, and they just steal the money in a rough time. I would assume that to be very uncommon, at best.

-Funds are invested in/backed by the company’s own stocks and/or bonds. When it goes bankrupt, these investments are worthless

-Funds are considered part of the company’s assets for some legal reason I can’t fathom. So, they are used to pay other creditors when the company goes under.

-There are no funds at all. The retirement benefits are just another debt/contractual obligation the company has. So, former employees get nothing, or almost nothing when the company closes its doors.

-There are no funds nor any contractual obligation. Paying those benefits is just an empty promise that can be reneged upon, or at least renegotiated, at any time.
So, what is the explanation? Or is there any other I didn’t think about?

Another question : are these kind of very unsafe retirement plans very common, or is it just that some plans are like that, and you hear about them a lot when these particular companies fill bankruptcy? Are they “old-fashioned” plans devised 50 years ago in a different environment, or are they still put in place and offered by new or at least more recent companies?
Next question : For people who “benefit” from such plans, are these the largest part of their retirement benefits? IOW do retires find themselves out in the cold when the company they used to work for goes under? Or are these plans a mere complement to their main retirement benefits?
Last question : assuming these plans are common, how do people feel about them? Are they asking for something more safe? Do they cross their fingers and hope for the best, something that would seem very foolhardy (how could someone bet on the company they’re working for still being operating 40 years down the road, and rely on this for their retirement)?

FTR, I would assume a safe retirement benefit plan to be funds secured, and managed by a third party.

2

I am not an expert but those are old-school companies that expected their employees to work for them for life. The modern plans are called 401K plans or smaller variations thereof for people in certain other professions. The employee owns a 401K plan and they are portable. I don’t think they can ever be taken away unless some sort of holocaust comes. Older companies often offered “pensions” which were dependent on the company’s existence. Few companies do that now because few companies have a workforce that doesn’t have rapid turnover. I have three 401k plans now from previous employers and I don’t think anyone can touch them. It is advised to “roll over” your 401K plan as you switch from employer to employer just so it is easier to administer.

3

They are referring to the old retirement packages that companies gave workers. those funds were mostly plundered in the 80’s and 90’s, when companies were bought out. Some people survived those plunders to find that their company can’t afford to pay them a monthly retirement check from their current assets. They are not talking about what most of the Americans now have which is a 401k account that is not the company’s money.

The number of men in particular living beyond retirement age increased greatly in the 80’s and 90’s also. One big reason is angioplasty preventing heart attack deaths. I lost a lot of relatives that were below retirement age from heart attacks before this procedure.

4

So, what was the status of these funds? Were they just part of the company’s assets that could be disposed of in any way the new owner saw fit?

5

Pretty much.

6

My answer is anecdotal and applies only to my situation with the corporation I retired from. The variations you could encounter are infinite; this is only one.

I’m retired from a corporation that still appears to be healthy and profitable. We had a ‘defined-benefit’ pension system when I started, but we lost it a few years before I retired. The old system used a formula based on pay and years of service to determine the pension an individual received; the pension was paid by the corporation. There was a fund set up to provide the money for the payments; the corporation provided the cash for the pension fund and managed it. Obviously, the money could be stolen before investment or by shady investments (though I don’t know of this occurring in my old corporation). Some of the investments can be in the corporation’s stock; if the corporation fails, that bodes ill for the pension fund. (A friend saw his pension and a big chunk of his 401K* evaporate when WorldCom went down in flames.) There are chances to play statistical games with the data that’s used to determine how much money needs to go to the pension fund each year. There are statistical games that can be played to decide the pension fund is “over-funded” (has too much money in it) and some assets may be extracted. There are rules and laws and oversight for alll this stuff; good luck with that. Congress may also change the rules from time to time, and it shouldn’t be a surprise if such changes favor the people who make the largest political contributions.

Congress may also decide that a corporation can change the type of pension system; which happened to me. We transitioned to a cash-value pension whereby they state a single amount you’re entitle to when you retire. Too bad for me: my cash-value amount could only produce 58% of the annual income I was going to get under the defined-benefit system. That also happened to thousands of other employees at the same time. Our retirement is less opulent that we may have planned. :smiley: Strangely, the CEO got a $25 million bonus that year. The best part is this: I took early retirement because they were giving hints that the old coots had to go: retire or be fired. A friend who still works there has calculated that additional changes to the pension plan since I left mean that working longer would have yielded an even smaller pension than I got.

  • Many corporations make full or partially-matching contributions to employee 401K’s. At the few corporations of which I have direct knowledge, every cent of the corporate investment goes into the corporate stock and cannot be moved to another investment type until it is ‘vested’. That is, the employee must hold it for a pre-set period of time. Employees also frequently invest some or all of their own 401K contributions to corporate stock: not necessarily a wise move in terms of diversification.
7

401K plans proliferated during the early 1980s, though they may have technically existed earlier. Companies liked them, of course, because it relieved them of the burden of administering a pension plan. The portability also meant that retired and former employees were not dependent on the company’s continued existence (generally, see below). As others have noted, this wasn’t necessarily true of company pension plans.

While the problems you have been reading about are usually associated with older style pension plans, this factor has proved to be a problem with many 401Ks. It’s up to the company as to what investment options are available for their 401K plan, and it isn’t like a brokerage account that lets you invest in anything you want to. Any I have had allowed you to allocate your money among a small group of mutual funds, ranging from an ultra-safe bond fund to a risky small-cap equity fund. Many companies would make one of the options in their 401K plan be investment in their own stock. In a few extreme cases, some companies made this the ONLY choice. Some would “sweeten the pot” in some way to encourage employees to choose this option. Obviously, it’s generally a bad idea - your company goes bankrupt, your 401K is now worthless, too. 401K plans are a great idea, but they push some responsibility onto the employees to make sensible investment choices in them.

8

We should also mention how contributions to (non-Roth) 401k plans work. The money is contributed from your paycheck in PRE-TAX dollars. This means that your taxable income is reduced by that amount, and the tax savings makes contributing the maximum allowable amount to your 401k worth it, even if you think the investment options in the plan are terrible. If the company is matching contributions, it’s REALLY a slam dunk.

(I believe 401k plans keep a lot of crappy mutual funds afloat, for just these reasons.)

9

I should have said the tax savings MAY make the contribution worth it, even if the choices are terrible. Over the long haul, it might be the case that you could theoretically do better by paying the tax, and investing the money yourself. For the average person, and a 401k whose choices aren’t totally abysmal, it’s probably better to just contribute the maximum.

At some point you will likely be rolling the 401k over into a more flexible IRA anyway.

10

One additional thing is that in the US we often use the term “benefits” to refer to employer-provided health insurance. Big companies like automakers often continue to provide insurance to retired employees. This is becoming increasingly rare for current employees, but still applies to a lot of current retirees.

The situation described above regarding loss of pensions is not inaccurate, but you could hear a group of retirees claiming losses or cutbacks of benefits when what they are referring to is health insurance, not pension, benefits. Such insurance benefits are often valued at $5,000+ per year, so nothing to sneeze at, especially since an older person will have a hard time getting good insurance on the private market. Also, unless they are specified in a contract, companies are free to discontinue retiree health benefits.