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The Slump and Your Retirement Plan

By Ellen Hoffman With the economy booming in recent years, employers made many positive changes in

retirement plans. But 2000 was a scary year in the market, leaving both companies and

employees struggling to navigate in the new world of sluggish tech stocks and sinking

earnings for many Old Economy stocks.

Given the number of companies that are laying off employees in droves and belt-tightening

overall, you couldn't be blamed for fearing that retirement benefits could end up on

employers' hit lists. But despite the slowing economy, experts say most employers remain

committed long-term to providing the retirement benefits they've promised. That's because

competition for talent remains strong, and employers still need to offer good retirement

benefits to remain competitive.

"Cutting the match [the matching funds companies provide for a 401(k) plan] would be an

invitation for people to leave a company," says David Wray, president of the

Profit-Sharing Council of America (PSCA), a group that represents companies with 401(k)s

and similar retirement plans. "High-quality, committed workers are treasured, and 401(k)

plans are preferred by this group. Employers will continue to support these programs."

EXECUTIVE PERKS. A recent PSCA study of 348 companies reported that 52%

of their 401(k) plans allow employees to start saving within three months of being hired,

compared with 32% in 1998. And 37% are allowed to start during their first month on the

job, compared to 24% in 1998. For an overview of features of 401(k) plans in 1999, you can

read the PSCA study at

Other trends in 401(k) benefits, reported recently by benefits consultant Hewitt

Associates, include offering more investment options, increasing investor education, and a

greater number of plans allowing participants to shift their balances between funds on a

daily basis. You can read the Hewitt study by going to and clicking on "Reports

and Publications," and then on "Trends and Experiences in 401(k) Plans."

Even highly paid executives, whose retirement benefits go beyond the 401(k) and are

usually more generous than those offered to other employees, have seen improvements in

their plans in recent years, according to David Hauptman, vice-president of Mullin

Consulting Inc., a benefits-consulting company in New York. These "nonqualified,

deferred-compensation" plans, as they're called by the IRS, offer either a fixed annual

growth rate of around 7% to 9%, or a "multifund option" that allows the executive to defer

compensation in any of several funds that may produce better returns than the fixed rate.

QUICKER SHIFTS. His company's survey of 200 Fortune 1000 companies found

that because executives were demanding that their returns keep pace with "the market's

bull run," the number of companies offering a multifund option increased to 58% in 1999,

compared to 25% in 1996. In the last year, Hauptman says, clients starting these new plans

have also allowed participants to reallocate their investments daily or monthly in order

to keep up with the market, instead of quarterly, the prevalent system in the past.

Given current market conditions, Hauptman suggests that executives who have multifund

plans should be asking employers for protection against the down market by adding a

money-market option.

While the changes reported in these various surveys may be reassuring, experts also

caution that we may have seen the end to increases in 401(k) matches and pension-plan

contributions. Also, some of the changes that companies have made, such as offering more

investment information and flexibility, don't increase costs and actually could result in


DELAYED NOTICE. But if economic conditions worsen, some companies could

be forced to reduce contributions or charge higher management fees for your accounts. U.S.

Labor Dept. spokesperson Gloria Della points out that your employer must notify you of

changes to your plan, but under federal pension rules, the company has until 210 days

after the end of the plan year (which could be a fiscal year or a calendar year) to

provide the formal notice.

Depending on the type of retirement plan you have, experts suggest that you watch closely

for the following potential changes:

--Peter Smail, president of Fidelity Employer Services Co. in Boston, which manages

many 401(k) plans, says that for plans with a profit-sharing feature, "it's too early to

say what's happening on profit-sharing decisions," and that it could be another month or

two before you know whether the company's contribution for 2000 will be as high as it was

during the bull market.

-- Ken McDonnell, a research analyst for the Employee Benefits Research Institute

in Washington, D.C., says an economic slowdown could prompt companies with traditional

pension plans (which guarantee a fixed retirement payment based on a formula) to convert

to cash-balance plans, which in many cases result in lower benefits for mid-career or

older employees.

-- Pat Jackson, a partner at Deloitte & Touche's employee-benefits practice in New

York City, says in the last few years, competition from dot-coms prompted many Old Economy

companies to be more generous with offers of stock options and that the collapse of so

many options in the tech world may lead more traditional companies to pull back on this

type of benefit.

According to Jackson, the main message is: Don't panic over the viability of your

retirement plan. "I would reassure employees that certainly the benefit programs are put

in place with the intention of being long-term," he says. But don't be too complacent.

Even if your retirement is a long way off, you should still care about changes -- for the

better or worse -- that happen now. Hoffman writes Your Retirement twice a

month, only for BW Online. An excerpt from her book, The Retirement Catch-Up

Guide, appeared in the July 17, 2000, issue of Business Week

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