Title: Do you want to work at Wal-Mart when you are 80?
1Do you want to work at Wal-Mart when you are 80?
2Reality 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?
3The 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.
4The Current State of Pension
- Emily Brazil
- Hunter Lewis
- Jennifer Margoles
- Joel Desmond Moskal
- Kara Myers
- Jed Staufer
5Overview
- Background and Traditional Pension Systems
- Current State of Pension Systems
- Application of a Modern Pension Plan
- Q A
6Background 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.
7Main Types of Pension Plans
- Defined Benefit Plan
- Defined Contribution Plans
8Defined Benefit Plan
- Traditional style of pension
- Considered nearly obsolete
- Used by companies like General Motors
9Defined 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.
10Defined 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.
11Mechanics 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.
12Mechanics
- 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.
13Current State of Pension Plans
- Issue 1
- Under-Funded Pension Plans
14Under-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.
15Under-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
16Case 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?
17Case cont.
- Capital Expenditure accounts
- Cash reserves
- Cash from earnings for the current year
18Example
- 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
19Example
- 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.
20Proposed 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.
21Current State of Pension Plans
- Issue 2
- Corporate Scandals
22Corporate 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.
23Corporate 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.
24Corporate 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.
25Corporate 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.
26Corporate Scandals
- Parties that were affected by these debacles
include - Individual company pension participants
- Several state pension funds such as California
- Individual investors
27Effects 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.
28The New Plan
- Defined Contribution Plans
29Defined Contribution Plans
- New age pension systems
- Includes plans like
- 401(k)
- IRAs
- Profit Sharing
- Used by most modern companies like Level 3
Communications
30Level 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.
31Vesting
- 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
32Level 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.
33Level 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.
34Level 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.
35Reasons 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.
36Reasons 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.
37Plan now or this is your future.
38Questions or Comments?