Thursday, December 17, 2009

WSJ: US Executives Enjoy 'Sure Thing' Retirement Plans

The Wall Street Journal reports on an inequity in the U.S. retirement system: one of the benefits of supplemental executive retirement plans for top executives is that many of them offer guaranteed rates of return. An excerpt:

Jacqueline D'Andrea last year lost more than 60% of the 401(k) savings she built over a decade as a Wal-Mart Stores Inc. manager, she says. The 1.2 million employees in the retailer's 401(k) retirement plan lost 18% as the market plunged, corporate filings show.

Top executives at Wal-Mart didn't face such risks. Thanks to a guaranteed 6.6% return, Chief Executive Officer H. Lee Scott Jr. had gains of $2.3 million in a supplemental retirement-savings plan, bringing its total savings to $46.7 million. "We're proud of the benefits we offer to our hourly associates" which include bonuses, 401(k) and profit sharing contributions, and merchandise discounts," said a Wal-Mart spokesman, who confirmed the plans' figures.

One-quarter of top executives at major U.S. companies had gains in their supplemental executive retirement-savings plans in 2008, even as employees had sizable losses in the companies' retirement accounts, according to a Wall Street Journal analysis. The gains in executive retirement accounts often stemmed from guaranteed fixed returns on executive-savings plans.


In their deferred-compensation plans, some executives have access to investment options that aren't available to other employees. For example, top executives at Bank of New York Mellon Corp. could invest their savings in a fixed-income fund that had a 6.6% return in 2008; thanks to electing this fund, Steven Elliott, senior vice chairman, had earnings of $1.3 million on his account, according to filings.

The fixed-income fund isn't available in the bank's 401(k) plan. The investments in the employees' retirement accounts fell 30%, filings show. A spokesman confirmed the information.

Top executives at Cummins Inc. could choose among three options: the return on the S&P-500 index, "the Lehman Bond Index, or 10 year Treasury Bill + 2%," according to filings. The executives at the engine maker had a total of $1.4 million in gains on their accounts, suggesting that none of them elected the stock index, which plummeted last year.

By contrast, the employees of the Indiana-based engine maker lost 29% on their 401(k) retirement accounts. A spokesman says the company doesn't disclose which option the executives chose, but says: "These are more senior people who can be expected to make more conservative investment choices than a 25-year-old in the 401(k)."


Some companies note that while fixed returns on executive deferred-compensation plans protect them from losses, they also limit their upside.

Executives at Illinois Tool Works Inc., a maker of fasteners and adhesives, received returns of 6.1% to 8.4% in 2008, while investments in the employees' 401(k) lost 25%. A spokeswoman says that so far this year, the average return of employees' 401(k) plans has been 23%, while the interest credited to the executives' deferred-compensation plan is just 5.6%.

Based on those figures, the average employee's account at Illinois Tool Works would have declined 7.8% from the beginning of 2008; the executive accounts would have gained between 12% and 14.5% in that time.

With the S&P 500 down a third from its October 2007 peak, some employees never will recover their losses. Ms. D'Andrea, the Wal-Mart manager, says her retirement kitty bounced back up to $8,000—about the average size of employee accounts in Wal-Mart's 401(k) plan—from a low of $6,000 earlier this year.

But the 48-year-old Henderson, Nev., resident lost her job in May and cashed out her account. Now, she vows to never join a retirement plan again. "It's too risky," she says.

Over the long haul, volatility is what does individual investors in. Going back to the Illinois Tool Works example, an employee who lost 25% in 2008 but gained 25% in 2009 does not come out even. $100 times 75% (a 25% loss) is $75, and $75 times 125% (a 25% gain) is $93.75. On top of that, individual investors tend to exit the market when its down and get back in when it's up, thus locking in their losses and missing market gains.

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