For Some Companies, Portable Pension Plans Aren't Practical
Many old-line manufacturers, for example, eschew portability because their workers still tend to stay for many years, and they don't see any change in that pattern. Consider the case of Midland, Michigan-based Dow Chemical Co. Philip Hartliep, manager of retirement operations, compensation and benefits for the chemical firm, keeps up on the issues and trends. He wants to be sure that workers are getting the best deal when they retire, and that the company is getting the best deal for the money that it's investing.
For the past couple of years, Hartliep has taken a critical look at the company's defined-benefits plan. The plan provides workers with a retirement benefit based on years of service, and tends to reward long-term employees. Last year, he even went so far as to float a couple of trial balloons with company management: Would a cash-balance plan be easier to understand? If workers are going to be more mobile, should they look for something more portable?
Hartliep didn't get too far. In fact, management shot him down. "Their belief is that changing pension plans because people are going to move around more isn't their responsibility," says Hartliep. "They see pension plans as a return for long service. Period." (Dow does provide its workers with a 401(k) plan, which is portable. Employees who choose to move on may take their account balances with them.)
The pensions-for-service mentality still exists.
Dow Chemical isn't alone in its thinking. "Many companies in large industries still expect employees to give long service," says Harold Loeb, a consulting actuary with Buck Consultants in New York City. "Many employers still have this pensions-for-service mentality."
Most employers are well-intentioned. Pensions emerged in an age during which employers couldn't afford to pay employees much money and wanted to give them deferred payments for service. "To some extent, it's a question of paternalism," says John Turner, deputy director of the Office of Research and Economic analysis, Pension and Welfare Benefits Administration, U.S. Department of Labor.
In his book, Pension Policy for a Mobile Workforce, Turner took a look at the reasons that employers resisted pension portability. Some firms, he found, are more productive when they have stable work forces. Others need to have their workers stay so that they can recoup training costs. At some firms, it's harder to do business if workers have long tenures. Still other companies can have work forces that leave or stay, and it doesn't matter.
"There's no simple conclusion or solution," says Turner. "If you mandated one type of pension plan, it would hurt some firms and not help others."
At the other end of the spectrum, he adds, are newer industries, such as high technology, electronics or biotechnology. Because these industries tend to attract a younger and more mobile work force, they're more likely to have portable retirement packages. However, because these industries are so new, their pensions are likely to consist of the same thing that Dow Chemical gives departing employees: a 401(k) savings plan.
Some Silicon Valley corporations, such as Apple Computer, offer a 401(k) savings plan as the primary retirement vehicle. Part of the reason is timing. Many of these firms were formed in the '70s. By then, there was a movement away from the traditional defined-benefit plan. Since the '70s, nearly 80% of the new plans have been defined-contribution plans.
These companies haven't been around long enough to make these kinds of benefits worthwhile, according to Luke Bailey, a partner in the San Francisco law firm of Greene, Radovsky, Maloney & Share. "They have a high turnover, and you aren't going to see a defined-benefit plan," he says.
Intel Corp. is an exception. At the Santa Clara, California-based computer firm, workers receive a 401(k). They also are enrolled in a profit-sharing plan that has a targeted benefit. The catch is that if employees don't stay long enough with the company, they lose part of it.
Pension plans must meet your company's needs.
The lesson is that HR managers must make their own decisions when deciding on the portability of a pension. At Washington, D.C.-based Marriott Corp., for example, there always will be a high turnover. That's just the nature of the hotel business. Management wants to provide some retirement vehicle as an inducement for employees to stay longer, but it would be wasting its money if it set something up for 40-year veterans. Its choice: a profit-sharing 401(k) in which employees can sock away 15% of their pay before taxes.
"During the last 33 years, we've looked at the alternatives," says Deborah Iwig, vice president of retirements and benefits for the hotel chain, "but then, when we look at the philosophy behind our plan, this makes sense." That philosophy is that individuals have some responsibility for looking out for their own retirement. "We don't owe employees a certain amount of retirement income," says Iwig. "That isn't our responsibility."
Other companies also have resisted the peer pressure. San Francisco-based Pacific Gas & Electric provides both a traditional pension for years and service and a 401(k). During the past couple of years, questions have been raised about allowing employees to take both their 401(k) and their traditional pension in a lump sum when they retire. The company decided against this practice for several reasons. "In part, we're being a bit paternalistic," says Gary Encinas, the company's legal counsel. "We want to ensure some safety net."
PG&E officials also took a look at their work force recently and concluded that despite the trends about increased mobility, most of their employees remain long-term careerists. "As our work force changes, we'll look at it again," says Encinas. "If our employees become more mobile, the equation will change, and the [pension plan] will change."
Personnel Journal, July 1993, Vol. 72, No. 7, pp. 38-39.