Joining a nationwide trend, a majority of Atlanta's 12 largest publicly traded companies are freezing traditional pension plans for tens of thousands of employees, replacing them with 401(k)s or switching to other retirement plans that are generally cheaper.
For many of the companies, which include Coca-Cola, Delta Air Lines and SunTrust Banks, the recession and financial crisis have been a major factor in the move. They have seen the total value of their pension plans slashed by the economic downturn, leaving them underfunded by billions of dollars that must be made up over the next several years.
But also driving the change, experts say, is a desire by younger, more mobile workers to build a retirement fund piecemeal as they move more frequently from employer to employer.
As a result, more metro Atlanta workers are joining the ranks of Americans shouldering primary responsibility for saving and investing enough money to fund their retirements. Only 17 percent of private-sector workers nationwide are now covered by traditional pensions in which a company promises its retirees a predictable retirement income no matter what happens in the financial markets.
"It's those people in their 40s and 50s that are going to get caught. They need to start saving and investing," said Thomas Stone, a former Delta executive who retired before the company froze its pension plan in 2004.
Stone, 64, says his own children don't expect to retire on a traditional pension like his. "It no longer makes sense for a company to take on that kind of obligation."
Says Diane Garnick, a New York investment strategist for Atlanta-based money manager Invesco: "I call the generation that's going to work today the 'yo-yo generation,' because 'you're on your own.' "
In fact, even as companies continue to abandon traditional pensions for alternatives like 401(k)s, a new survey by securities broker Charles Schwab shows that nearly a quarter of U.S. companies have suspended matching contributions or are considering doing so.
"That's what we call the slippery slope," said Nancy Hwa, spokeswoman for the Pension Rights Center, a nonprofit advocacy group in Washington, D.C. Companies partially freeze their pension plans and convert to a cheaper pension plan or 401(k) plan, then later freeze that pension plan or suspend 401(k) contributions as well, she said.
"It's kind of a race to the bottom, which is unfortunate."
So few employees now have traditional pensions, said Dallas Salisbury, president of the Employee Benefits Research Institute in Washington, D.C., that "if you go down the street, most of the people you run into are not affected" by freezes or other pension changes.
Of two dozen people interviewed during a recent lunch hour in downtown Atlanta, only a handful worked at companies with pension plans, and those were already frozen. Several said they were more worried about the impact of the past year's plunge in stock prices on their 401(k) plans.
Earned benefits kept
Of the dozen Atlanta firms that are members of Standard & Poor's 500 index, seven have frozen or plan to freeze their traditional pension plans or convert to cheaper versions, including Coca-Cola, Delta, SunTrust, Equifax and Newell Rubbermaid. One of the dozen, Home Depot, doesn't offer traditional pensions. The freezes or conversions probably affect most of the companies' more than 140,000 U.S. employees, though senior employees at some companies are exempted.
Other companies and organizations with metro Atlanta ties that also have frozen pensions recently include Russell Corp., Wells Fargo, NCR Corp. and the Atlanta Convention and Visitors Bureau. The latter two also have suspended contributions to employees' 401(k) plans, as have UPS and Zep Inc., although Zep, citing signs of economic improvement, said last week it's phasing them back in.
Pension freezes by big companies are significant because they have been among the last employers to abandon the traditional retirement benefits that most large firms once offered.
In the 1980s, virtually all Fortune 100 companies offered traditional "defined benefit" pensions that promised retirees a fixed income for life. Likewise, the number of traditional pension plans run by a single employer has dropped from 92,000 in 1990 to 29,000 now, according to the report earlier this year by the federal Government Accountability Office.
When a company freezes a pension plan, it continues to honor whatever benefits its employees have earned up to a certain date. Some companies do only partial freezes, such as barring new employees from existing plans. Others freeze employees' credit for future years of work but still adjust pensions for salary growth. Freezes don't affect the already vested benefits of retirees or former employees.
One local company that has not frozen its pensions is UPS. Company officials said the package-delivery giant is in good shape to continue its pension plans because it had a $4.4 billion surplus in the plans before the financial crisis and recession. The company expects to pump $778 million this year into its plans, which cover more than 400,000 employees.
"We haven't seen any reason" to curtail UPS's pension benefits, said spokesman Norman Black.
Obligation exceeds assets
The financial crisis and changes in federal regulations have helped spur pension changes at many companies.
Investment losses on pension funds at UPS, Delta, Coca-Cola and eight of the metro area's other S&P 500 companies topped $11.5 billion last year. As a group, those companies' pension plans are underfunded by almost $16.5 billion, meaning the estimated value of their pension obligations exceeds their assets by that amount.
For instance, Coca-Cola's pension plans worldwide lost $961 million last year, lopping nearly a third of the value of the company's pension portfolios. Delta's pension deficit ballooned to more than $8.6 billion last year after it took over Northwest Airlines' underfunded pensions and also lost more than $1 billion on the combined pension plans.
While experts and company officials say such whopping numbers don't mean those pension plans are near collapse, the big deficits do put more financial pressure on the companies.
For many companies, said Kevin Wagner, retirement practice director at consulting firm Watson Wyatt's Atlanta office, replacing traditional pensions is a "long-term fix" aimed at stabilizing their bottom lines.
Flexible plans new trend
The current financial fallout has shaken many of the pillars of the social contract between companies and employees, Wagner said.
"You can see medical benefits are under attack right now. Retirement benefits are under attack right now," said Wagner. "We are in a real state of change and so much of it is going to be fundamentally decided by the economy."
He said that over the past few years, Atlanta has been a hotbed for conversions to so-called "cash-balance" plans, which still promise a defined benefit but cap companies' long-term pension risk. Companies typically contribute about 4 percent of a worker's salary annually to an account that grows at a variable interest rate. If employees quit before retirement, they can take the lump sum with them.
"It is a more equitable distribution" for many employees that don't expect to stay at one company long-term, said Wagner. "As you go from employer to employer to employer, there's more of a steady build-up" of retirement savings.
Added Garnick, many younger employees are willing to trade the long-term security of a more costly traditional pension for the short-term possibility of a higher salary and more flexible pension plan.
In Atlanta, Delta, Newell-Rubbermaid and Equifax, have boosted contributions to defined contribution plans such as 401(k)s. Coca-Cola and SunTrust are among companies replacing their traditional pensions with cash-balance plans.
Coca-Cola and SunTrust say the moves aren't pension freezes since they're switching to cash-balance plans, which are also defined-benefit plans. However, in filings with the Securities Exchange Commission, both companies disclose that they have frozen or are freezing portions of their older pension plans. Coca-Cola said the change reduced its pension obligation by $21 million.
In either case, said Hwa of the Pension Rights Center, the moves usually leave employees with smaller retirement nest eggs and facing more risk when the market crashes.
"We see it as mainly a cost-cutting measure for the companies," she said. "When people have only a 401(k) and see that decline 40 or 50 percent, it's very difficult for an older worker to get that back."
Conversions to cash-balance plans have stirred controversy. They are usually less favorable to longtime employees than traditional plans, since retirees get a lump sum rather than a pension check for life. It's left up to them to make sure the lump sum lasts.
A federal court temporarily shut down conversions to cash-balance plans when it ruled in 2003 in favor of IBM employees who alleged the plans discriminated against older workers. But an appeals court overturned the ruling and Congress passed the Pension Preservation Act, which clarified how companies could avoid the discrimination issue when switching to cash-balance plans.
Retirement plans
The pension landscape has changed radically since the 1980s, when more than 80 percent of private-sector employees' retirement plans were traditional "defined benefit" pensions. Now more than 60 percent have only 401(k) plans that allow tax-sheltered retirement savings. Many companies have converted their traditional pensions to cash-balance plans that limit their financial risks.
Traditional pension: Funded solely by the employer, it is calculated based on a formula using base compensation and number of years of service, with longer-term employees earning a larger benefit. Usually employees must work a minimum number of years to be eligible.
401(k) plan: In such plans, companies usually match a portion of employees' voluntary contributions to an account in which the individual worker makes the investment choices rather than the employer. Companies sometimes automatically contribute to these plans after freezing their traditional pension plans.
Cash-balance plan: These promise a pension benefit in the form of a lump sum rather than a fixed income. Typically companies contribute about 4 percent of a worker's salary annually to an account that grows at a variable interest rate. Employees who leave can take the lump sum with them.
Check our sources
Companies' changes to their retirement plans are disclosed in footnotes in their annual 10-k filings to the U.S. Securities and Exchange Commission: www.sec.gov.
The Pension Rights Center publishes a list of companies that have frozen pensions or suspended 401(k) matching contributions: www.pensionrights.org
The Employee Benefits Research Institute has extensive information on pension trends: www.ebri.org.
