Target CEO $47 Million Retirement Illustrates 401(k) Gap

The Rise of 401(k)-Type Plans

The gap in the U.S. workplace between the highest and lowest paid has been growing for years. Far less noticed has been the growing gulf in retirement pay.

While the very top often continue to receive executive pensions as well as other benefits, most workers are left only with their 401(k) plans.

CEO compensation at large U.S. companies was 204 times higher than the pay of workers on average in 2013, up 20 percent since 2009, according to data compiled by Bloomberg. And the retirement benefits divide “perpetuates income inequality into old age,” said Paul Hodgson, a corporate governance consultant who has researched executive compensation.

Some industries illustrate this trend more starkly than others. Big retailing chains, with their armies of lower-paid floor workers and their elite executive ranks, can be especially emblematic of the retirement gap.

Gregg Steinhafel, who stepped down as chief executive officer of Target Corp. in May following a massive credit-card data breach, received retirement plans worth more than $47 million. When he joined Target in 1979, the Minneapolis-based company offered generous retirement programs -- so generous for executives that it included a deferred compensation plan that paid a guaranteed 12 percent interest.

That’s quite a contrast with the average Target employees’ retirement plans. Steinhafel’s total package is 1,044 times the average balance of $45,000 that workers have saved in the company’s 401(k) plan.

Steinhafel’s Package

Steinhafel’s package included $27.7 million from a combined pension plan for top executives and a deferred compensation plan, according to proxy filings. He was also paid $9.8 million from an earlier deferred compensation plan, as well as an additional $9.9 million in interest payments on that sum.

In addition, Steinhafel, a 35-year Target employee, got a $7.2 million cash severance payment and $4.1 million from vested stock awards when he left at age 59. This was on top of the more than $20 million in cash salary and bonus he earned over the prior five years and $56.4 million in realized equity gains over the same period, according to company filings.

Target said its directors have changed executive compensation programs to better reflect the retailer’s commitment to pay for performance and that Steinhafel was the last top executive eligible for the deferred compensation plan that paid 12 percent interest. Steinhafel couldn’t be reached for comment.

Compensation Ballooned

“In response to shareholder feedback, we embarked on a comprehensive overhaul of our executive compensation programs to even better align compensation with company performance,” said Eric Hausman, a spokesman for Target.

For decades executive retirement savings plans were designed to replace CEO incomes, which were more modest than today.

“These benefits weren’t originally intended to be huge wealth generators,” said Gary Hewitt, director of governance research at Amsterdam-based Sustainalytics, which provides research to investors. “But it’s become that as CEO compensation has grown to 200 to 300 times what average workers make. They’re controversial and harder to justify now that companies have abandoned pensions for those in the ranks.”

Many who save in a 401(k), by contrast, don’t have enough for a secure retirement. At Target, those who work less than 1,000 hours aren’t eligible to save in the plan at all.

‘Take the Cake’

“Target throws workers a cracker and top executives take the cake,” said Ron Pierce, a former worker at the retailer’s distribution center in Stuarts Draft, Virginia. “Who can even spend $47 million? I’d like to see a chunk of that go for pensions for all employees.”

Pierce, employed at Target from 2007 through 2012, advocated for better worker benefits and wages. He said he put in 10-hour shifts, lifting 5,000 cartons a day for $21 an hour. By the time he left, Pierce had $32,000 in his 401(k) account. Target matches 100 percent of workers’ contributions, up to 5 percent of their pay. He also left the company with a one-time payout of about $4,600 from a pension, which the company ended for new employees in 2008.

The retailer’s 31,000 retirees received an average annual pension benefit of about $4,000 in 2013, according to company filings. For current employees, Target has “below average” participation in its 401(k), according to BrightScope Inc., a San Diego firm that rates 401(k)s.

Decline of Pensions

Target store workers, like those at other retailing companies, earn at the lower end of the pay scale -- store clerks typically make about $10 an hour. Such companies not only have low 401(k) participation rates, many also tend not to automatically enroll their workers, said BrightScope CEO Mike Alfred.

Among the challenges for those earning hourly wages has been the almost universal decline of traditional pensions. The number of pension plans dropped by more than 70 percent to about 42,300 between 1984 and 2012, while 401(k) plans multiplied to more than 500,000 from 17,000 in that period. Employee funded 401(k)s haven’t effectively replaced those pensions. The median combined 401(k) and individual retirement account balance for households headed by people between 55 and 64 was $111,000 in

2013. Those savings will provide a little more than $4,000 a year, assuming the recommended 4 percent withdrawal rate.

It’s a different reality for CEOs and their top lieutenants, especially those with so-called executive pensions.

Deferred Compensation Plans

Sometimes called supplemental executive retirement plans, or SERPs, they’re usually calculated by multiplying years of service and the average pay earned over the executives’ last three to five years of service, when earnings are at their peak.

About 30 percent of Fortune 1000 companies offered SERPs in 2013, according to consulting firm The Newport Group. Unlike pensions, SERPs are generally unfunded liabilities on companies’ balance sheets. They’re paid in cash when executives retire or leave.

More common than SERPs are deferred compensation plans, which more than three-quarters of Fortune 1000 companies offer, according to The Newport Group. They allow executives to set aside salary and bonus income on a pretax basis and circumvent caps lower-paid employees face on contributions to 401(k) accounts. About half of these companies contributed to their executives’ balances and three-quarters of the plans had different options, usually more robust than those offered to 401(k) participants, The Newport Group said.

McKesson CEO

Like Target’s Steinhafel, John Hammergren, the CEO of McKesson Corp., has been awarded a varied mix of retirement benefits. Hammergren’s deferred compensation was valued at $30 million in 2013, according to proxy filings. Additionally, his executive pension was valued at $159 million, making it the most lucrative for a CEO at a company in the Standard & Poor’s 500 Index, according to compensation consultants.

The 55-year-old CEO of the San Francisco-based medical-products company agreed last year to reduce his pension by $45 million and cap its value at $114 million, following complaints from activist investors.

“It’s important to note his pension is no longer subject to fluctuations based on continued service, changes in pay rates or changes in interest rate assumptions,” Kristin Hunter, a spokeswoman for the company, said in an e-mail.

McKesson’s traditional pension for all employees was frozen in 1996 and the executive pension was ended for new participants in 2007, Hunter said. The company has had a 401(k) plan since

1983.

Sweeteners

The dwindling universe of companies that still offer traditional pensions to employees often give sweeteners to top executives. Exxon Mobil Corp. CEO Rex W. Tillerson’s pension was valued at $2.1 million in 2013. In addition, he had a supplemental pension valued at $21.1 million and an “additional payment plan” valued at $38.6 million, according to proxy filings.

About 1,000 U.S. executives at Exxon are on track to receive that sort of additional payout, based on the average of the three highest bonuses received in the last five years prior to retirement, according to proxy filings.

“Exxon Mobil maintains retirement and other employee benefits to attract and retain the best talent,” said Alan T. Jeffers, a spokesman for the company.

That’s good for the coveted top tier. For everyone else, workers must save whatever they can and make it last as long as possible. Pierce, the former Target worker, has about $150,000, including what he saved at Target. He’s living on $1,000 a month and hopes to find a less physically taxing job.

“If I live only eight or 10 more years, I can get by, because I don’t have kids and my house is paid off, but if I have 20 or 30 more years, I’m worried,” he said.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE