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President Barack Obama is promoting two proposals that would deliver two more blows to the voluntary nature of the private retirement system.

In his 2010 budget blueprint unveiled February 26, Obama proposed requiring employers sponsoring 401(k) or similar defined-contribution plans to offer automatic enrollment. A second proposal would require employers without existing retirement plans to enroll their employees in a direct-deposit individual retirement account.

The president’s proposals follow one in the works by senior Democratic congressmen that would provide funding relief to companies with defined-benefit plans that commit, for an undefined period, to keep their plans open.

All three are seen as steps toward changing the nation’s retirement system from a voluntary one to a mandatory one. And the potential for a combined assault on the voluntary nature of retirement plans is giving some pension industry lobbyists the shudders.

Chief among their concerns is the possibility of additional requirements, such as a mandate that employers provide matching contributions to their defined-contribution plans, something that has always been voluntary, said Ed Ferrigno, Washington vice president of the Profit Sharing/401(k) Council of America, based in Chicago.

“Where does this stop?” Ferrigno said. “It’s very ominous.”

Kathryn Ricard, vice president of retirement policy for the ERISA Industry Committee in Washington, agreed.

“It’s that slippery slope of what’s next; that’s what gives us pause.”

“Employers will be concerned that this is the first mandate in what has been a voluntary system,” said Jan Jacobson, senior counsel, retirement policy at the American Benefits Council in Washington.

Despite those concerns, the concept of enrollment mandates has the support of the mutual fund industry’s Investment Company Institute in Washington.

“We should consider requiring all 401(k) plans to use automatic enrollment and automatic savings escalation,” Paul Schott Stevens, ICI president and CEO, said at a February 24 hearing on strengthening retirement security before the House Education and Labor Committee.

Another retirement-related proposal in Obama’s budget would dramatically expand the existing saver’s tax credit program to make it fully refundable, meaning qualified taxpayers would receive a federal payment to their retirement accounts. That proposal has the support of the Profit Sharing/401(k) Council of America.

 “The goal is to increase savings,” Thomas E. Gavin, a spokesman for the White House’s Office of Management and Budget, wrote in an e-mail response.

“As the budget noted, 75 million working Americans—roughly half the work force—currently lack access to employer-based retirement plans,” Gavin said. “In addition, the existing incentives to save for retirement are weak or non-existent for the majority of middle- and low-income households.”

Meanwhile, House Education and Labor Committee Chairman George Miller, D-California, is considering sweeping reforms to the U.S. retirement system, though he has yet to endorse any specific proposals.

Miller said he had heard several proposals aimed at making retirement coverage universal. “People clearly believe you have to do this.”

During the February 24 hearing—the first of a series planned to consider how to strengthen the U.S. retirement system, Miller said Congress had to address ways to improve 401(k) plans, making them more transparent, fair “and operated on behalf of the account holder, not Wall Street firms.”

“But we must also ask the difficult questions about the state of our nation’s retirement system as a whole and look to see whether we need to create a new leg of retirement security,” Miller said. “For too many Americans, 401(k) plans have become little more than a high-stakes crapshoot.”

Among those hoping to help fill in Miller’s reform agenda are the Pension Rights Center, the Economic Policy Institute and the National Committee to Preserve Social Security and Medicare, all worker advocacy and policy groups in Washington.

The three groups plan to announce on Tuesday, March 10, an effort to establish a “new retirement system that, together with Social Security, will provide universal, secure and adequate income for future retirees,” according to a PRC advisory. No specifics have been revealed.

With the retirement reform train roaring out of the station, House Republican Leader John Boehner of Ohio is asking GOP lawmakers to come up with alternatives to Miller’s efforts to help the public rebuild savings and retirement accounts that have been devastated by the economic downturn, said Kevin Smith, a spokesman for Boehner.

“This is an effort to counter the fight that George Miller has already picked: He wants to wipe out 401(k)s completely and replace them with accounts controlled by bureaucrats instead of the people who own them,” Smith said. “We will vigorously oppose that idea and develop solutions that better help rebuild Americans’ savings.”

Filed by Doug Halonen of Pensions & Investments, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.

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The House Ways and Means Committee, not the House Education and Labor Committee, should have jurisdiction over 401(k)s and other pension plans, said Rep. Richard Neal, D-Massachusetts.

House Education and Labor Committee Chairman George Miller, D-California, has already launched a series of hearings on 401(k) and other potential pension reforms this year.

In remarks Thursday, March 5, at the Investment Company Institute’s 2009 Retirement Savings Summit in Washington, Neal said the Ways and Means Committee—which he is a member of—should be in the driver’s seat on pension issues. “He [Mr. Miller] has a small slice of it,” Neal said after his remarks. “It’s our responsibility.”

Aaron Albright, a spokesman for Miller, declined to comment.

Neal, who chairs the House Select Revenue Measures Subcommittee, also said he planned to introduce legislation in the next several weeks—which would enact a proposal in President Barack Obama’s 2010 budget blueprint—to require employers who don’t currently offer a retirement program to enroll their employees in a direct-deposit individual retirement account. But Neal also said he would consider ways that would prevent the program from becoming mandatory.

Also at the conference, Tom Reeder, benefits tax counsel for the Department of Treasury, said agency guidance on how defined-benefit plan sponsors should smooth assets in calculating their pension-funding obligations should be forthcoming within the next several days. President George W. Bush signed legislation December 23 that makes clear that pension funds can smooth their assets over the 24-month period. But according to Reeder, the plans can’t actually do the smoothing calculations until the Treasury issues its guidance.

Filed by Doug Halonen of Pensions & Investments, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.

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Seeking help in communicating available federal benefits to your organization’s lower-wage employees? Corporate Voices for Working Families, a nonprofit corporate membership organization, offers its 2008 Employer Guide: Educate Your Employees About the Benefits They’ve Earned. The guide includes information about the Earned Income Tax Credit and Medicaid, corporate best practices on using the guide to help employees access these and other programs, and more. Click here to read more about the tool and to register for downloading the guide.

Retirees of auto parts maker Delphi have frantically organized themselves in recent weeks to fight their former employer’s attempts to terminate their health care coverage by working to form a health care trust similar to one created for their unionized colleagues.

Last month, Delphi received qualified permission from a bankruptcy judge to terminate health care benefits for its 15,000 salaried retirees. The judge said cutting those costs was necessary to help the company emerge from bankruptcy. Delphi, which filed for Chapter 11 bankruptcy in October 2005, argued that ending retiree health care would save the company $70 million annually and removes $1.1 billion from its balance sheet.

But retirees are appealing that ruling, saying the company promised them in writing that they would receive health care in retirement. Delphi is also seeking to end its life insurance benefits. The judge is expected to rule Wednesday, March 11.

“It’s definitely harder to be protected unless you have a collective bargaining agreement and a union to protect you and language that protects your benefits,” said Stuart Wohl, retiree health practice leader for Segal & Co.

Paul Higgins, who worked as an international service manager for Delphi Thermal in Lockport, New York, for more than 44 years, said the company has not responded to the retirees’ request to fund a health care trust known as a voluntary employee beneficiary association.

Delphi would not comment pending the legal outcome, a spokesman said.

Unionized workers at Detroit’s Big Three automakers and Delphi have created a similar health care trust. While it remains to be seen whether the struggling automakers will be able to fully fund the VEBAs, the trusts already have enough money to provide benefits in the near term. At the end of 2008, the VEBA for General Motors workers had more than $10 billion in it, according to GM’s annual report.

Delphi retirees said they feel betrayed.

“The salaried workers don’t have a union, so Delphi doesn’t have to go through negotiations,” said Higgins, 67. “It’s easy picking, the lowest fruit on the tree.”

It is not unusual for salaried workers to establish VEBAs during bankruptcy if they have something they can use to bargain, like walking off the job, VEBA experts say. That is something workers are unlikely to do in this economic climate.

“Who’s going to walk off a job and not get paid in these economic times?” Higgins said.

Employers are moving to end or limit retiree health care. This year, 58 percent of employers offered retiree health care, compared with 59 percent a year earlier, according to Hewitt Associates.

Last summer, GM announced it would no longer provide health care benefits to white-collar retirees 65 or older, instead providing a slight increase in pension payments to help cover the cost of supplemental Medicare plans. Ford has made its white-collar retirees pay more for medical benefits. Chrysler eliminated medical benefits for its retired salaried workers in 2006.

Milton Beach, 55, would have preferred to keep working, but he said he took a forced retirement in January during a round of layoffs. After representing Delphi as a public relations manager for 34 years, he finds himself fighting for what he feels was promised to him.

“I think my feelings are typical,” he said. “You feel betrayed.”

—Jeremy Smerd

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Amid the deepest economic collapse in generations, corporate America is coming up with a novel way to justify extravagant executive pay: Ignore the bad news.

Companies that sank into the red last year are looking past a host of business expenses, ranging from asset write-downs to higher-than-expected operating costs, to rationalize paying brass even more than they got in flush times. Others appear to be reducing pay but continue to bestow extraordinary perks, such as “golden coffins.”

Defiant shareholders admit that reining in the practices is a tough battle, even though the dire economy and lousy results would seem to make pay cuts a given.

“Executive pay is the ultimate shell game,” said Richard Ferlauto, a longtime critic of corporate compensation practices and director of pension investment policy at the American Federation of State, County and Municipal Employees. “Boards come up with all sorts of new ways to pay people whose performance shows they don’t deserve it.”

Just last week, New York Stock Exchange parent NYSE Euronext Inc. said chief executive Duncan Niederauer had been awarded total compensation of $7.1 million in 2008—his first full year in the job—including $4 million designated as a “performance bonus.”
Niederauer’s pay was nearly $2 million more than predecessor John Thain got in 2006, his last full year at NYSE. The exchange’s performance in 2008 was dismal by almost any traditional measure. It posted a $738 million net loss, and the stock price fell 68 percent. (Rival Nasdaq dropped 50 percent.)

The loss was driven by a $1.6 billion asset write-down related to the 2007 acquisition of Paris-based Euronext. NYSE concluded that European operations will generate less cash than expected because of bleak markets and regulators’ opening trading to more competition, a much-anticipated development that hurt its market share and led to lower transaction fees.

In defending Niederauer’s pay, NYSE argues that the company fared better in 2008 than its financial results and stock price suggest. A spokesman pointed out that revenue rose 4 percent, while fixed operating expenses declined. “Pro forma” earnings rose 9 percent when the merger-related charges and other items are excluded, the spokesman said. “The board deemed that, overall, we met targets as a company,” he said.

Indeed, NYSE directors had tried to show Niederauer more largesse. They had established a $5 million “target bonus” for him but ultimately awarded less because management cut the companywide bonus pool by 20 percent. In a regulatory filing, the board said, “We believe individual performance would have supported higher award levels.”

Munificent as NYSE was, Loews Corp. went the extra mile when it came to CEO James Tisch.

Loews, whose holdings include hotels, insurers and oil exploration outfits, lost $182 million from continuing operations last year, and its stock price sank 44 percent. Yet the board paid Tisch $7 million—8 percent more than in 2007, when Loews generated $1.6 billion of net income from continuing operations.

Grading pay on a curve
The company covered Tisch’s raise partly by excluding $2 billion worth of setbacks that it said “would not be appropriate” to consider when setting pay.

The bad news includes a higher-than-budgeted $204 million of catastrophe losses in its insurance division, nearly five times as much as in 2007, mainly due to hurricanes Gustave and Ike. Companies often exclude noncore items when determining compensation, but Loews acknowledged in its annual report that catastrophe losses are an “inevitable” part of its insurance business.

Loews directors also decided it wasn’t fitting to consider the insurance division’s $750 million of realized investment losses. Additionally, they dismissed more than $750 million of write-downs in the oil exploration unit, which stemmed partly from revaluing reserves to account for lower commodity prices.

“What does ‘pay for performance’ mean if you ignore performance?” Ferlauto said.

Loews declined to comment.

Some CEOs are willing to accept less compensation. Stephen Schwarzman of the Blackstone Group cut his pay 99 percent last year, to $350,000, after the firm swung to a $1.2 billion net loss connected to heavy write-downs. Numbing the pain was the $180 million Schwarzman pocketed in 2007, when he took his leveraged-buyout firm public.

But even companies that have better aligned their pay policies with the times still seem to have a tin ear when it comes to what critics call over-the-top perks.

For example, the total pay of Verizon Communications Inc. CEO Ivan Seidenberg fell 30 percent last year, to $18.6 million. But some shareholders are peeved that his heirs stand to collect up to $35 million payable upon Seidenberg’s death—an unusual benefit known as a “golden coffin.”

Arguing that shareholders shouldn’t be saddled with a payment for which no service can be rendered, the Philadelphia city employees’ pension fund and another public pension fund have filed a shareholder resolution for Verizon investors to vote on the perk.

Verizon insists that golden coffins are necessary to retain key employees.

But the pension funds wryly retort that “in our opinion, death defeats this argument.”

Check stubs
Duncan Niederauer, $7.1 million
NYSE chief collects a performance bonus after posting a $738 million net loss.

James Tisch, $7 million
Loews CEO gets 8 percent hike from board that ignored $2 billion worth of bad news.

Ivan Seidenberg, $18.6 million
Verizon head keeps controversial $35 million “golden coffin.”

Filed by Aaron Elstein of Crain’s New York Business, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.

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The 9th U.S. Circuit Court of Appeals on Monday, March 9, declined to review a unanimous 2008 decision by a three-judge appeals panel upholding the legality of a San Francisco health care spending law. A San Francisco-area restaurant trade group that challenged the 2006 law, which went into effect last year, had asked for the full appeals court to review the panel’s decision.

A majority of the active members of the appeals court rejected the request for an en banc review. In a decision written by Judge William Fletcher, the appeals court again said the San Francisco law was not pre-empted by the Employee Retirement Income Security Act.

Fletcher also said that the San Francisco law was different from a Maryland law—overturned by the 4th U.S. Circuit Court of Appeals—that required large employers to spend a certain percentage of payroll on health care, or pay the difference to a fund used to provide coverage to the uninsured. As a result, there was no conflict at the appeals court level, he wrote. Fletcher also wrote the original appeals decision.

Under the law, employers with 100 or more employees must make health care expenditures in 2009 of at least $1.85 per hour for every eligible employee working at least eight hours a week, and employers with 20 to 99 employees must make health care expenditures of at least $1.23 per hour. Expenditures can include payment of group health insurance premiums, health savings accounts and health reimbursement arrangement contributions, or payments to San Francisco.

The case is being watched by employers nationwide who fear the San Francisco law could lead to a wave of new health care spending laws by other cities and states looking for ways to expand coverage.

That would result, benefit experts say, in both higher health care and administrative costs for employers, as they try to keep on top of new benefit mandate after benefit mandate, and would make it extremely difficult for multistate employers to offer uniform health care benefit plans.

Kevin Westlye, executive director of the Golden Gate Restaurant Association, said the group intends to seek U.S. Supreme Court review of the ruling by the 9th Circuit.

Filed by Jerry Geisel of Business Insurance, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.

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