Do you want to work at Wal-Mart when you are 80? - PowerPoint PPT Presentation

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Do you want to work at Wal-Mart when you are 80?

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Title: Do you want to work at Wal-Mart when you are 80?


1
Do you want to work at Wal-Mart when you are 80?
2
Reality Check
  • How many people want to retire wealthy?
  • How many people plan on retiring wealthy?
  • How many people in this room have started
    planning for retirement?

3
The Numbers
  • To have a retirement income of 65,000 per year,
    you must have 3 million dollars at age 59 when
    you retire.
  • This requires 16,000 in annual contributions
    starting now.
  • If you wait until age 30 to start, those
    contributions jump to 33,000 annually.

4
The Current State of Pension
  • Emily Brazil
  • Hunter Lewis
  • Jennifer Margoles
  • Joel Desmond Moskal
  • Kara Myers
  • Jed Staufer

5
Overview
  • Background and Traditional Pension Systems
  • Current State of Pension Systems
  • Application of a Modern Pension Plan
  • Q A

6
Background Information
  • What is Pension?
  • Pension is an account partially or wholly funded
    by an employer or organization that is a source
    of income for retired employees.

7
Main Types of Pension Plans
  • Defined Benefit Plan
  • Defined Contribution Plans

8
Defined Benefit Plan
  • Traditional style of pension
  • Considered nearly obsolete
  • Used by companies like General Motors

9
Defined Benefit Plans
  • These plans are basically a giant fund that a
    company adds money to each year.
  • The fund consists of a mix of stocks, bonds, and
    cash that is supposed to appreciate enough over
    time that it can pay benefits to the retirees.

10
Defined Benefit Plans
  • The money that is added to the account is
    completely paid for by the company
  • This money is not earmarked for specific
    employees
  • Instead, calculations are made to determine how
    much money is needed to cover all pension
    liabilities for each year.

11
Mechanics of Defined Benefits
  • A specific dollar amount that is needed to pay
    all fiscal pension liabilities is determined.
  • This amount is then discounted back to the
    current time at a discount rate to establish
    how much money must be added to the fund.

12
Mechanics
  • This discount rate is mandated by the
    government, and it is the current 30-year
    treasury yield.
  • In the past, pension fund investments performed
    well, and treasury rates were high, which led to
    a lower net present value, and therefore less
    needed funding.

13
Current State of Pension Plans
  • Issue 1
  • Under-Funded Pension Plans

14
Under-funded Pension Accounts
  • The dot-com bubble burst in March of 2000.
  • Trillions of dollars have evaporated in the form
    of capital losses since 2000
  • Pension fund investments are part of this figure.

15
Under-funded pension accounts
  • These capital losses have compounded the damage
    when they are paired with the higher discount
    rate that has been used in the past.
  • Example

16
Case In Point
  • The fund needs 1,000,000,000 and only has
    537,534,600
  • This shortage of 462,465,399 is still needed to
    cover the upcoming pension liabilities.
  • Where does the money come from?

17
Case cont.
  • Capital Expenditure accounts
  • Cash reserves
  • Cash from earnings for the current year

18
Example
  • IBM
  • Defined benefit plan
  • Under-funded by 2.3 billion for 2003 alone.
  • Cash needed to fund pension account will be taken
    from pretax income
  • 2003 earnings per share may be revised downward
    by as much as .30 per share

19
Example
  • General Motors
  • Fund worth 40 billion--twice the value of their
    market cap.
  • Currently their account is still 32 billion
    under-funded.
  • It needs 9 billion just to get through the next 2
    years.
  • At least some funding will come from cash
    reserves.

20
Proposed Solutions
  • Unfortunately, the solution that keeps coming up,
    is to dissolve defined benefit plans completely.
  • The companies then want to adopt less expensive
    defined contribution plans, which will be
    explained in a few minutes.

21
Current State of Pension Plans
  • Issue 2
  • Corporate Scandals

22
Corporate Scandals
  • Enron and Worldcom were the two biggest corporate
    scandals in U.S. history.
  • Fraudulent activities led to billions of dollars
    in investment losses, including a handful of
    pension funds that collapsed, leaving retirees
    with nothing.

23
Corporate Scandals
  • Enrons pension fund consisted of a 401(k) for
    employees that was comprised solely of Enron
    stock.
  • While the company was on the verge of disaster,
    executives told employees to buy up the stock so
    the price wouldnt collapse while they all dumped
    their shares.

24
Corporate Scandals
  • When the truth about the company emerged, the
    stock price plummeted, and employees were locked
    out of their accounts.
  • All they could do was wait and watch as their
    nest eggs were crushed.

25
Corporate Scandals
  • Worldcom had a similar effect after reporting
    over 9 Billion in falsified earnings
  • Their market cap went from nearly 132 billion to
    nothing, and even more retirement accounts and
    pension funds were wiped out.

26
Corporate Scandals
  • Parties that were affected by these debacles
    include
  • Individual company pension participants
  • Several state pension funds such as California
  • Individual investors

27
Effects of Enron/Worldcom
  • After the scandals, almost all pension systems
    changed drastically
  • Concepts like diversification reared their head
  • Investments other than a companys own stock were
    made available for employees.

28
The New Plan
  • Defined Contribution Plans

29
Defined Contribution Plans
  • New age pension systems
  • Includes plans like
  • 401(k)
  • IRAs
  • Profit Sharing
  • Used by most modern companies like Level 3
    Communications

30
Level 3 before Enron
  • Prior to the Enron scandal, Level 3 pension was
    only offered in the form of a stock purchase
    matching program
  • The company matched salary contributions to
    purchase Level 3 stock, with a rolling 3 year
    vesting period
  • All employees that participated had their entire
    retirement in Level 3 stock.

31
Vesting
  • A waiting or holding period for benefits that is
    used as a strategic retention tool.
  • It promotes loyalty and longevity with a company
  • During the tech boom, retention was very
    difficult so rolling vesting was a good retention
    tool

32
Level 3 after Enron
  • The Enron debacle showed that the plan that was
    in place could leave employees with no money for
    retirement if the company failed.
  • The Pension director and investment committee
    developed an entirely new program to protect the
    employees.

33
Level 3s New Pension Plan
  • Starting Jan. 1, 2003 a diversified 401(k) plan
    became available.
  • Employee contributions are put into one or
    several mutual funds.
  • Level 3 matches the contributions, and the money
    is used to buy units of the Level 3 Fund.

34
Level 3s New Pension Plan
  • Employees have the immediate option to transfer
    that value to one of the mutual funds, without
    any penalties or fees.
  • The vesting period is still 3 years, but
    contributions vest 100 after 3 years.

35
Reasons for the Change
  • The new system protects the employees from loss
    if the company fails, while giving them the
    option to increase their ownership in the
    company.
  • A diverse list of mutual funds offers a portfolio
    structure for all participants, even those close
    to retirement.

36
Reasons for the Change
  • The new system allows the employees to decide how
    much to invest.
  • The company is only liable for matching
    contributions, not for paying retirees a salary
    from an account that can become under-funded.

37
Plan now or this is your future.
38
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