Epitaph: THE GAMES CONTINUE

JUST DAYS AFTER the massive health care overhaul became law on March 23, 2010, large companies announced that health care reform was already costing them billions of dollars. Caterpillar was the first, announcing a $240 million hit, followed by Deere & Co., ($220 million), Verizon ($970 million), and AT&T, with the largest charge of all, $1 billion.

These statements were red meat to Fox News, where pundits concluded that this was evidence that “Obamacare” was already on its way to bankrupting the country. Former Arkansas governor Mike Huckabee, speaking on Fox Business Happy Hour, was troubled by the impact on Americans as a whole. “Whether it’s your phone bill or the cost of a tractor, the only way the companies can survive is they’re going to have to up their cost, cut their benefits, lay off employees.”

Administration officials went on the defensive, frantically trying to explain that the “charges” were merely accounting effects having to do with the retiree health coverage, not employee health coverage, and had something to do with Medicare subsidies. But they might as well have been speaking Sanskrit to the nimble-fingered reporters rushing to get the Really Big Numbers online and into print. In the initial press frenzy, no one reported that none of the companies taking these massive charges was on the hook for a cent. The $1 billion charge that AT&T was taking? It represented the loss of a deduction for something that was costing the company nothing in the first place.

This mini-drama was just the latest example of employers crying wolf about the cost of retirement benefits, or, in this case, employer-subsidized prescription drug coverage. But it illustrates how employers continue to use the public’s ignorance of accounting and the way retiree benefits work to bamboozle analysts, employees, retirees, unions, Congress, and the courts.

This Medicare charade was just the latest inning of a game that started in late 2003, when Congress was poised to add prescription drugs to the things Medicare covered. Large employers recognized an opportunity: Many were providing prescription drug coverage to retirees as part of their retiree health benefits. Their basic message to lawmakers was “Why should we continue to provide prescription drug coverage if Medicare is going to start covering it?”

Employers threatened to dump millions of retirees onto the government program unless the government sweetened the deal for them. The companies were bluffing. For one thing, they had already largely dropped prescription drug coverage for salaried retirees or had shifted much of the cost to them. And they couldn’t unilaterally cancel coverage for union retirees covered by collectively bargained contracts. But lawmakers didn’t know employers were making an empty threat. In any case, providing a subsidy to employers was a safe political move: They would appear to be helping retirees, being pro-business, and saving taxpayers money.

So lawmakers awarded employers a generous subsidy. Beginning in 2006, the companies would receive a subsidy of 28 percent of what they paid, up to $1,330 per retiree, per year, to help pay for prescription drug coverage.

That sounds straightforward, but there were windfalls within windfalls. Not only was the subsidy tax-free, but employers could deduct the government handout. In other words, they could treat the free government money as if it were coming out of company coffers, and deduct every cent. Employers did the happy dance.

Even better: The legislation said that employers would receive a subsidy of 28 percent of the cost of the coverage, but it didn’t say the employer’s cost. Thanks to the lack of one critical word, companies maintained they could receive the subsidy based on what the retirees spent. This created a situation in which, even if the retirees paid for 100 percent of the prescription drugs themselves, their former employer would get a tax-free subsidy of 28 percent of what they paid, and then deduct that amount. This combination made it possible for some employers to restructure their programs so that 100 percent of the prescription drugs was paid for by the government and the retirees.

It isn’t clear whether this boondoggle was the result of a drafting error—after all, these bills tend to be nailed down in the dead of night, after a lot of horse trading among various interested parties. Or, more likely, it was the result of the stealthy fingers of lawyers and lobbyists for employers. Regardless of how it got there, this unintended benefit for employers went unnoticed until after the Medicare drug law was passed.

When the Treasury discovered it in early 2004, it complained about this gravy train, which was, as tax loopholes go, pretty impressive. The federal Centers for Medicare & Medicaid Services, among others, criticized the deduction as a windfall. From the first, it was tops on the list of execrable giveaways that some in the Treasury had their knives out for, though they didn’t get a chance to take a stab at rescinding it until late in 2009.

At that point, the Obama administration was scrambling to identify dubious tax breaks it could eliminate to help offset the cost of the new health care program. The Medicare subsidy deduction was a prime candidate. Employers launched their lobbyists to try to save what some critics were calling double deduction. Echoing the threat they’d made in 2003, employers said that unless they were allowed to keep the deduction, they wouldn’t be able to afford to continue to provide the prescription drug coverage and would drop it altogether. This time, the argument didn’t work. The deduction would end, but not right away. Employers still had four more years to deduct the free money they received to subsidize benefits that the retirees, in many cases, were paying for.

But when health reform passed, employers correctly assumed that almost no one knew this backstory, or how the accounting worked, and were able to make some political hay.

AT&T announced that, because of health reform, it was taking a $1 billion hit. As predicted, shareholders, analysts, lawmakers, and the media assumed this meant that AT&T’s health care bills would rise by $1 billion. AT&T didn’t disabuse the public of this misperception.

What was really happening was that AT&T had to reverse part of the gain it had taken after the subsidy was granted in 2003. When it was awarded the subsidy, it estimated how much it would receive in government subsidies over the years, including the value of the deduction, which is recorded as a “deferred tax asset” (which simply means that when a company knows it will pay pensions, deferred comp, or other retiree benefits in the future, and deducts the amounts, it reports the value of those future deductions as an asset).

AT&T estimated how much it would receive in subsidies over the lives of its retirees and reduced its obligation by $1.6 billion in 2003.

Like many other companies, AT&T went ahead and cut prescription drug coverage for salaried retirees anyway. Less than a month after the Medicare Prescription Drug Act was passed, AT&T announced steep increases in deductibles and co-pays for prescription drugs, which shaved its costs by $440 million in 2004 alone.

Fast-forward to 2010: Because it would no longer be able to deduct the subsidy after 2013, AT&T had to reverse the value of the deduction it had recorded as a deferred tax asset. Although AT&T could continue to deduct the subsidy until 2013, accounting rules required it to recognize the change right away.

Under the alchemy that is retiree benefit accounting, AT&T, which in 2003 had estimated that the total value of the subsidy would be $1.6 billion, was now saying that losing the ability to deduct the subsidy—which it would still receive, tax-free—would erase $1 billion in deferred tax assets. Other companies reported surprisingly high charges but wouldn’t say how they calculated the amounts.

Towers Watson released a “study” concluding that the loss of the deduction would cost corporate America $14 billion in profits, though it, too, was thin on details about how it summoned up that figure. The irony was that if anyone had an incentive to inflate the figure, it was the administration, since a bigger figure would make it look like it was raising more revenue to pay for healthcare reform. Its estimate: $4.5 billion.

Henry Waxman, chairman of the House Energy and Commerce Committee, was suspicious of the figures, and called for a hearing of the Subcommittee on Oversight and Investigations. He invited the CEOs of Caterpillar, Verizon, Deere, and AT&T to disclose the assumptions they used to generate their giant accounting charges.

This provided fresh fodder to critics of health care reform. “Waxman Convenes the First Death Panel” was the eye-catching headline of an online editorial on the Wall Street Journal Web site. “Dems Threaten Companies for Revealing Obamacare Costs” was a flash line on Fox Nation. “Are they going to pressure these big companies into not really telling the truth about the economic effects of health care on their organizations?” asked Gretchen Carlson, co-host of Fox & Friends. The more animated online critics regressed to fifth-grade, calling Waxman a variety of names, including Nazi, Czar, and hobbit.

Though Representative Waxman’s doubts had to do with the size of the charges, not the timing, the companies, in an effective public relations move, accused the White House of playing political games with the accounting. A Wall Street Journal editorial pointed out (correctly) that “accounting rules require that corporations immediately restate their earnings to reflect the present value of their long-term health liabilities, including a higher tax burden.” Then it pointed out (incorrectly) that the administration was trying to force companies to commit accounting fraud. “Should these companies have played chicken with the Securities and Exchange Commission to avoid this politically inconvenient reality? Democrats don’t like what their bill is doing in the real world, so they now want to intimidate CEOs into keeping quiet.”

Meanwhile, Wall Street Journal reporters, who some believe were put on earth so that they and the Wall Street Journal editorial writers would cancel each other out, explained—take a deep breath—that the companies were merely taking noncash charges to reflect the loss of a deduction for the projected amount of tax-free money the companies expected to receive in the future, to pay drug benefits that retirees were paying for anyway.

That less-than-snappy message was what Commerce Secretary Gary Locke tried futilely to explain to reporters seeking a sound bite. In the wake of the backlash, Waxman postponed his hearing indefinitely. But the American Benefits Council, which represents three hundred large employers and has for years diligently worked to help eviscerate retiree health benefits, hosted a media briefing “to set the record straight” and urged the White House and Congress to repeal the change. The “new tax,” it said, would discourage companies from hiring new workers and lead to hardship for retirees. “The fact of the matter is, oneand-a-half to two million retirees will not be able to keep the coverage they like,” concluded James Klein, the spokesman.

AT&T, which had again slashed retiree health coverage in 2009 and 2010, said it was considering dumping its prescription drug coverage altogether. That prospect cheered shareholders; following the announcement, AT&T shares closed nine cents higher.

TROUBLEMAKERS

The false alarm about the impact of health reform on retiree health benefits is just one of the latest ways employers have used the opaque retiree accounting rules to dupe a gullible public. When it comes to retiree benefits, stirring people into a frenzy about supposed problems has always been an effective way to distract them from real problems and disguise the purpose of the proposed solutions.

Employers blame the growing ratio of retirees for some of their woes. Yet as we’ve seen, a growing number of retirees leads to falling pension obligations. Once employees retire, their pensions stop growing, and the liability for their pension declines with each dollar paid out. If the retirees take their pensions as a one-time lump sum, the obligation for their pensions falls to zero, and liabilities are further reduced when the lump sums are worth less than the monthly pension, as is common. Lump sums also shift longevity risk to retirees, as well as investment risk, interest rate risk, and inflation risk.

“Spiraling retiree health obligations” are another often overblown peril. The reality is that many employers face little exposure to the risk of rising health care costs because they’ve capped the amounts they will pay. As retirees shoulder a greater share of the costs, the healthier ones get cheaper coverage elsewhere, and the sicker ones remain in the plans, driving up costs. The spiraling costs are passed on to the retirees, forcing more to drop coverage. The drop-outs and benefit cuts further reduce the obligations and generate gains. And, as counterintuitive as it seems, as retirees age, the cost for their health coverage falls. When retirees reach sixty-five, most of the costs are picked up by Medicare, and employers receive a taxpayer subsidy to pay for much of the remaining prescription drug costs.

Paying for the benefits isn’t always as onerous as employers make it sound. Utilities are subsidized by ratepayers, and military contractors are subsidized by taxpayers. Salaried employees often subsidize union retirees, whose benefits are contractually bargained for and thus can’t be unilaterally cut by employers. (But don’t blame the unions: Employers often promise to maintain their benefits in lieu of salary increases, a deal that saves the companies money.) As in the cases of Lucent and others, many employers have the ability to tap their pensions to pay the benefits.

What’s having a bigger impact on earnings at many companies is the cost for their executive deferred-compensation plans, which affect income the same way unfunded retiree health plans do: They’re unfunded obligations and, without income from assets to offset their expense, they hit earnings hard. Unlike retiree health obligations, these executive obligations are steadily growing, and aren’t subject to the same steady hatchet employers have taken to their retiree health plans.

The growing burden employers don’t want to talk about is for their executive liabilities, which are growing steadily behind the scenes and at some companies now exceed the obligations for the rank-and-file pensions. And for all the beefing people are doing about public pensions, they don’t realize that executive liabilities are the equivalent of having a public pension plan buried in the balance sheet: The liabilities can spike in the final years, are hidden, understated, growing, and underfunded (actually, they’re completely unfunded, which makes them a bigger burden).

SELF-INFLICTED

Employers that freeze pensions blame their “volatility” and their unpredictable impact on their balance sheets. But if pension plans are volatile, employers should blame no one but themselves. In the 1990s, a lot of them stopped managing pension plans as long-term investment portfolios and began treating them like casinos. Pension managers shifted more of the assets into stocks to take advantage of the accounting rules that let investment income flow, indirectly, into company profits and lift earnings.

These accounting rules further encouraged risk by letting companies use hypothetical, or assumed, rates of return for the assets in the pension plans, rather than the actual returns, when calculating the pension plan’s impact on company earnings. Consequently, any investment, regardless of quality or risk—leases in overbuilt strip malls, timber rights, dodgy bonds, cash, or the company’s own stock—can provide a guaranteed “return” of 8 percent to 10 percent, or whatever assumed rate of return the employer adopts. On paper, anyway.

These rules give pension managers a false sense of security because they delay the impact of the investment losses. With no immediate consequences for bad investment decisions in the pension plans, it’s not surprising that the percentage of equities in pension plans doubled, from 35 percent of assets in the early 1990s to more than 60 percent by 1999, a level that remains today.

Companies should have learned their lesson when the tech bubble burst in 2000, ushering in a grinding three-year bear market. Pension plans lost billions, but many companies could draw on their stockpiled credits to delay the impact on earnings. These stockpiles were quickly depleted, which led to a frenzy of pension freezes.

Thanks to double-digit returns during the ensuing mortgage bubble, combined with gains from pension cuts, the plans were collectively fully funded by 2007. But pension managers had no margin for error. The percentage of plan assets in stock still exceeded 60 percent, and when the subprime crisis arrived in late 2008 and 2009, it erased as much as one-third of the assets in pension plans.

By then, employers had already consumed the huge cushions of surplus and had used up the stockpile of credits. Their solution: Many that hadn’t already done so froze their plans.

This ability to cut pensions when the plans had investment losses effectively shifted the investment risk to employees and retirees. It’s a trend that has upended the risk-reward trade-off in retirement plans: In 401(k)s, employees bear the investment risk but also keep all the upside. In pensions, employers are supposed to bear the investment risk and keep the upside. Not anymore.

The real problem with pensions isn’t “volatility.” It’s that the accounting rules enable employers to gamble with retirees’ money and then shift the risk to them. And if the plans collapse altogether, companies can shift the risk to the PBGC.

Having shot off their own toes, employers are now seeking “funding relief,” which would enable companies with weak pension plans to delay putting money into them: Forcing them to contribute to their pensions, they say, will divert precious cash they need to avoid layoffs, hire new workers, and create more jobs.

Their argument, some version of which has been around since the dawn of ERISA funding rules sounds plausible to many lawmakers on both sides of the aisle. But companies seeking funding relief fail to acknowledge that most of their current woes are self-inflicted. They took on too much risk but failed to fund when the party inevitably wound down. They withdrew too much money—and in many cases paid their executives too much compensation—instead of contributing to the pension plans for retirees. Their pleas for funding relief are little different from the banks asking for bailouts after their own risky lending practices and financial shenanigans brought the economy to its knees.

Companies in financial trouble, and with chronically deficit-riddled pensions—notably automakers and steelmakers—are the ones pushing most aggressively for funding relief, though they’re the very companies that shouldn’t get it. Likewise, financially troubled companies with well-funded plans don’t need relief, either: What’s really needed is laws that make it tougher for companies to terminate their pensions to capture the surplus money.

Healthy companies with well-funded pensions certainly don’t need “relief.” Many are sitting on record amounts of cash and are happy to contribute billions to their plans. The contributions are deductible and grow tax-free, while the expected investment returns provide a guaranteed lift to profits. Because remember: If the investments were outside the pension plan, the only way to get income from them would be to sell them, pay taxes on the gains, and report what’s left as income. Add to these tax benefits the variety of ways employers can tap the assets and the pension plan looks like a pretty nice place to park money. And, as the ERISA Advisory Council demonstrated in their meeting in 1999, the surplus is never really locked up.

What these healthy companies with healthy pensions really want is the ability to stuff even more money into their pension plans, which they’re prevented from doing. Congress enacted the full funding limit in 1987 to prevent employers from using their pension plans as tax shelters. It prohibits employer contributions if assets exceed 150 percent of the current liability. Employers have lobbied to undo this regulation ever since.

Bottom line: When it comes to funding rules, employers don’t want to be forced to contribute, yet they also want to be able to contribute as much asas they’d like. They argue that these freedoms would enhance retirement security. We’ve seen how well the current laws work. These “solutions” would only lead to more of the same.

Another reality check: Analysts’ reports on the state of pension funding, which employers, lawmakers, and the media routinely cite, overstate the amount of underfunding. The funding figures come from SEC filings, which include the value of executive pensions and foreign pensions. These are typically unfunded, which brings down the funding percentages, thus making the supposed “underfunding” of employee pension plans in the United States appear worse than it is.

BAD PLAN

As employers phase out pensions, 401(k)s are becoming the dominant way to save. But 401(k)s won’t save the day. Many excellent books have been written about the inadequacies of these plans. They’ve already proven to be failures for young and lower-paid workers, who don’t participate, contribute too little, and then spend whatever they have saved when they change jobs.

Even middle-class workers who diligently save are unlikely to accumulate enough to support them in retirement. The plans may be loaded with employer stock that employees are locked into, and the accounts are collections of investing accidents that are even less likely to survive the inevitable market meltdowns. At the end of the day, 401(k)s have been a boon primarily for high-income employees, who can afford to save, and who simply move existing assets into tax-sheltered retirement plans.

These deficits have been well documented. They aren’t the only ones. Like pensions, 401(k)s have a hidden history, and a darker side. That’s why the “solutions” to improve 401(k)s won’t work.

For one thing, despite the 401(k) plan’s image as a democratic savings plan for the masses, it was never intended to be a savings vehicle for the rank-and-file. Employers first set up 401(k)s in the early 1980s so managers could defer their bonuses. The IRS stepped in, saying that taxpayers shouldn’t be subsidizing a discriminatory system. To keep the tax breaks, the plans had to cover a broad group of the rank-and-file.

If the IRS had said “all employees,” or “all employees whose last names begin with the letters P through Z,” there would be no question about who could or could not participate in the 401(k). But, as we’ve seen, employers took advantage of loopholes in the discrimination rules to exclude millions of low-paid workers, provide them with less generous contributions, and make it hard to join the plan and build benefits. In short, many companies have continued to manage 401(k)s for the benefit of the highly paid.

With this in mind, consider the employers’ proposals to increase participation among the lower-paid. One is “automatic enrollment,” enacted in the 2006 Pension Protection Act, which was sold as a way to include participation among the low-paid, because employees are automatically signed up unless they opt out. As long as employers merely offer automatic enrollment (even if low-paid employees opt out) and contribute 3 percent to their accounts, the plans don’t have to pass discrimination tests.

In the abstract, automatic enrollment sounds great. But plug in some real numbers and the picture isn’t so rosy. For a nurse’s aide making $20,000 a year, the 3 percent contribution will cost the employer just $600. That won’t exactly break the bank. But employers are now lobbying for “relief” from the mandated 3 percent contribution, citing hard times. They still want to have the safe harbor from the discrimination rules, though.

They also continue to lobby for a repeal of the contribution limits, currently $16,500 a year for an employee, saying that this would increase retirement savings. It would—for the highly compensated employees who are already saving. Employers would also benefit, because more of a highly paid employee’s savings would be in the 401(k) rather than the unfunded deferred-comp plan.

But how would allowing the highest-paid employees to save more—including those with far more lucrative deferred-compensation plans—improve savings rates for the low-paid? Employers’ answer: By giving executives more of a stake in the small-fry 401(k), they’re more likely to maintain it, not eliminate it altogether.

Not likely. Employers enjoy too many benefits from 401(k) plans.

ESOPs FABLES

We saw in Chapter 1 how many 401(k)s were created to enable companies to capture surplus money from pensions they terminated: By setting aside 25 percent of the surplus in a replacement plan, like a 401(k), they could pay only a 20 percent tax on the rest of the money, and keep it.

Companies then began using employee stock ownership plan (ESOP) assets to fund their contributions to 401(k)s, an arrangement called a KSOP. Since the early 1990s, more than a thousand companies, including Marriott, McKesson, Bank of America, Verizon, Sears, McDonald’s, Parker Hannifin, Procter & Gamble, Abbott Labs, and Ford, have quietly adopted this new hybrid structure.

One way this works: An employer that wants to build a factory might borrow $100 million from a bank, use it to buy $100 million of its own shares, and contribute the shares to an ESOP. The ESOP repays the bank, and the employer contributes an equal amount to the ESOP. The employer than taps the shares to contribute to employees’ 401(k) accounts.²¹ By funneling loan money through ESOPs, employers can deduct both the principal and interest on their loan repayments, reducing borrowing costs by as much as 40 percent. KSOPs provide employers with an additional tax break: They can deduct the dividends on the company stock they contribute to 401(k)s, a move worth tens of millions of dollars a year to large companies. KSOPs demonstrate the dual purpose retirement plans often have: They enable employers to get low-cost loans while inexpensively funding their retirement plans.

There’s nothing inherently wrong with a company trying to maximize its tax savings, but it isn’t always a win-win situation for employees. Like the hybrid pensions companies were adopting in the 1990s, these hybrid 401(k)s provide benefits to the employers, sometimes at the expense of employees.

More than 10 percent of the total assets in 401(k)s is invested in employers’ own stock, and at some companies the percentage of employer stock in 401(k)s is even higher, which leaves employees dangerously exposed to the fate of their company and industry. If a money manager put that much of a pension plan’s assets into a single stock, he’d be fired for idiocy and sued for violating fiduciary standards. But retirement savings plans—where the employees bear all the risk—are exempt from “diversification rules” that make it illegal to invest more than 10 percent of a pension plan’s assets in the employer’s own securities. This lack of diversification led to some spectacular debacles, including the $1.2 billion employees at Enron lost when the tech bubble burst.

RISK DIFFERENTIAL

The miracle of the 401(k) was again put to the test in 2008. During the worst market meltdown since the dawn of 401(k)s, fifty million workers lost a total of at least $1 trillion in their 401(k)s when the market cratered in 2008.

Jacqueline D’Andrea, of Henderson, Nevada, was among them. She lost more than 60 percent of the 401(k) savings she’d built over a decade as a manager at Wal-Mart. Her account had grown to almost $20,000 by the beginning of 2008. By the end of the year it had fallen to $6,000. When she lost her job in May 2009, D’Andrea, forty-eight, cashed out her account to pay for living expenses until her unemployment check kicked in. She’s learned her lesson, she says: If she ever has a job again that offers a 401(k), she’ll steer clear. “It’s too risky,” she says. Other Wal-Mart employees did better, but, overall, the 1.2 million employees in the retailer’s 401(k) retirement plan lost 18 percent as the market plunged. Even the employee discount isn’t going to make up for that.

The outcome was different in the corner office. Chief executive H. Lee Scott Jr.’s supplemental retirement savings plan had a guaranteed return of 6.6 percent, which added $2.3 million to his account during the investment storm, bringing the total to $46.7 million.

Employees are expected to bear all the investment risk in their 401(k)s, but when it comes to the executive equivalent of 401(k)s, their deferred-comp plans, that isn’t always the case. The same year that employees were losing upward of 40 percent of their savings, one-quarter of top executives at major U.S. companies had gains in their supplemental executive retirement savings plans that year, thanks to the guaranteed returns many receive.

Comcast, the giant cable operator, provides top executives with a guaranteed 12 percent return on their supplemental savings. This produced $7.4 million in gains for executive vice president Stephen Burke in 2008, boosting his deferred-compensation account to $71 million. The 72,000 Comcast workers lost 28 percent of their savings, a total of $649 million. The average account size by the end of the year: $24,000.

“When the market went down, executives in fixed plans were happier than hogs,” said a benefits consultant in Sacramento who works with employers.

One would think that at the other 75 percent of companies, which don’t offer guaranteed returns for top management, the executives would face the same risk as the employees. Typically, they’re given investment selections that mirror the mutual funds available in the employee 401(k) plans.

But they don’t necessarily face the same risk. Even when given the same investment selections as employees, some executives managed to pick only winning funds.

Don Blankenship, CEO of Massey Energy, the controversial coal company, could have elected to allocate his supplemental savings among eight investment options, including small capitalization, international, and index mutual funds. Most of these funds were down 40 percent or more in 2008. But Blankenship’s account had earnings of $909,939 that year because he apparently allocated his $27 million in savings to the only fund among the eight that had a positive return, Invesco Stable Value Trust, which was up 3.4 percent. Massey employees, who had the same fund selections as the executives, lost a total of $44 million, or 25 percent of their savings.

Top officers at Cummins Inc. also had a choice of investment options: the return on the S&P 500 Index, the Lehman Aggregate Bond Index, or 10-Year Treasury Bill + 2%. All the top executives selected only winning investment options, and had a total of $1.4 million in gains on their accounts. Meanwhile, the employees of the Indiana-based engine maker lost 12 percent on their 401(k) retirement accounts. A spokesman had an explanation for this investment success: “These are more senior people who can be expected to make more conservative investment choices than a 25 year-old in the 401(k).”

Employees who saw their retirement savings slaughtered then had another setback: Hundreds of companies stopped contributing to the 401(k) accounts at all. United Parcel Service was one of the larger ones: It suspended contribution to its 60,000 employees’ 401(k) plans in 2009. The move saved the global package delivery company $190 million that year. The company blamed the “challenging worldwide economic environment” for its decision.

But the company’s cost cutting didn’t extend to stock awards for highly paid managers and executives: It paid a few thousand of them more than $450 million in stock awards that year, an increase of almost 10 percent over the year before. “The Compensation Committee believes that the retirement, deferred-compensation and/or savings plans offered at UPS are important for the long-term economic well-being of our employees, and are important elements of attracting and retaining the key talent necessary to compete,” noted the March 2009 proxy.

UPS is part of a broader trend that hasn’t been highlighted in annual reports, analyst surveys, or benefits consultants’ reports to the media: Even as they limit or suspend contributions to 401(k)s, employers have been awarding a growing amount of stock compensation to their upper ranks. This isn’t just stock options, whose ultimate value can be a crapshoot. Most of this is in the form of restricted shares, which have an actual, defined cash value to the recipient.

Comcast’s expense for stock awards and options was $208 million in 2008, up 27 percent from the year before. The expense for the 401(k) plan: $178 million.

Honeywell employees also took a one-two blow to their 401(k)s. The 178,000 employees in the “Savings and Ownership Plan” (a KSOP) lost 29 percent of their savings. Senior managers at the engineering-and-aerospace conglomerate, however, enjoyed guaranteed returns ranging from 6.3 percent to 10 percent. The next year, in 2009, Honeywell cut its 401(k) match in half and said it wouldn’t increase it “until there is greater certainty in the economy.” By 2010, the expense for the 401(k) plans had fallen to $105 million from $220 million in 2008. Stock compensation expense, meanwhile, grew 28 percent over the same period, to $164 million.

Regardless of whether companies are suspending contributions, dozens are spending more on stock awards than they are for 401(k)s: Kraft Foods, State Street Bank, Dell, Marriott, and International Paper, just to name a few.

The trend hasn’t been studied, but it might be worth a look. Employer contributions to 401(k) plans and awards of restricted stock have a lot in common. Both are forms of deferred compensation—i.e., pay for services rendered today that employees don’t receive until later. Both are subject to vesting rules, meaning that employees and executives can forfeit the company contributions if they don’t stay long enough to lock them in. Employees don’t pay income taxes on contributions to 401(k)s until they withdraw the money, nor do they owe income taxes on restricted shares until they cash them in.

The chief difference, as we’ve seen, is that savings plans for employees don’t create a liability; deferred comp and restricted shares do. So, as companies shift more of their retirement resources from employees to executives, they’re also adding to their retirement obligations.

HELPLESS

The architects of today’s retirement mess—consultants and financial firms—have also played a non-starring role in the public pension debacle. The difference was that, while they helped private employers hide pension cuts and exaggerate their pension woes, they also helped public employers quietly boost benefits and hide the growing liabilities.

They not only helped private companies drain assets from pension plans, but also helped public employers avoid contributing in the first place, enabling legislators and politicians to conjure up cash for popular projects, without raising taxes, and look like community heroes.

And while they were helping private employers to load their retirement plans with stock, some consultants and financial firms duped many public pension managers into investing in complex and risky derivatives whose value later exploded, just like the subprime loans with low teaser rates that predatory lenders conned millions of homeowners into.

In the private sector, current and future retirees are bearing the brunt of the retirement heist; in the public sector, the carnage is being borne by the employees and by the communities around them.

The scapegoat game continues. Corporate employers are still blaming aging workers, retiree “legacy costs,” and “spiraling” retiree health care costs for their financial woes—not their own actions that squandered billions of dollars in pension assets, their thinly masked desire to convert benefits earned by and promised to retirees into profits for executives and shareholders, and their willingness to sacrifice retiree plans, and the well-being of retirees, for short-term gains.

In the public plan sector, the scapegoats are the public employees and retirees, who are beginning to have the haunted look of victims of the Salem witch hunts. The real culprits are the self-serving politicians and officials who passed the funding buck to future generations, the consulting firms that helped them do this, and the investment banks that conned local governments into investing taxpayer-funded pensions in risky, abusive investments.

The reforms employers are pushing today are the same reforms the ERISA Advisory Council proposed when it met in 1999 to discuss the “problem” of companies having too much surplus in their pension plans: Allow employers greater latitude to use pension money to pay retiree health and layoff benefits, ease funding rules, lift funding ceilings, and lift the benefits limits in 401(k)s and pension plans. The latter recommendation would facilitate discrimination in retirement plans and enable employers to shift billions of dollars of executive liabilities into their regular pension plans. More quietly, employers and insurers are looking to ease restrictions on buying life insurance on workers, which they supposedly use to pay for retiree health benefits but actually use to finance deferred compensation.

Though characterized as reforms that would improve retirement security, employers propose them with a veiled threat. They remind lawmakers and regulators—as they have for the past thirty years—that it’s a voluntary system, and they don’t have to have pension or retirement plans at all. If they don’t get their way, they might just pull the plug on their plans altogether. This often causes lawmakers to fall in line. (And besides, who isn’t for retirement security?)

But this threat is the equivalent of a five-year-old threatening to hold his breath until he turns blue. The fact is, employers can’t fold their benefits tents at will: The pensions people have earned are legally earned delayed compensation, protected by law. (Though they can be cut or frozen going forward.) Retiree health benefits for unions are protected by negotiated contracts. Employers have put pretty much everything else—future pension accruals, retiree health for salaried retirees—on the chopping block already. Or can at any moment.

And, of course, the “pull-the-plug” threat is a bit less effective when companies have already frozen their pensions. The only move left is to terminate the plans. But they aren’t going to do this, either. Not yet. Unless the pension is woefully underfunded and a candidate for dumping in bankruptcy, a frozen pension plan is more valuable alive than dead.

Apart from all their other benefits for employers, frozen pension plans can function as shadow plans for executive liabilities. The investment returns offset the cost of the executive obligations, and the frozen plans often contain QSERPs, the mini–executive pensions that employers carve out within the regular pensions by taking advantage of loopholes in the discrimination rules.

The assets in pension plans have largely recovered from the market crisis losses, and, as interest rates finally begin to rise from their historic lows, liabilities will fall. The surpluses will build again and be available for a variety of corporate purposes. And unless employers withdraw the money, when the surplus is substantial enough, companies may pull the plug on their pensions and use the termination loophole to capture much of the surplus money. At that point, the only pensions left will be for the executives.

This is the hidden history of the retirement crisis—a story that hasn’t made it to Fox News, the Huffington Post, or even Comedy Central. This retirement heist has produced a transfer of benefits earned by three generations of post–World War II middle-class workers to a comparatively small cohort of company executives, shareholders, and the financial industry that orchestrated the plunder.

If employers continue to control the retirement system and manage it for their own benefit, then within our lifetimes, “retirement” will inevitably revert to what it was in the 1930s and before. Society—and taxpayers—will be paying for services to support the millions of elderly, formerly middle-class Americans.