A Tour Pro's Nest Egg

How much do PGA Tour players get when their careers are over? The figures might surprise you

The stroke that brought Vijay Singh's $10.9 million 2004 season nearer to the $22.5 million Manny Ramirez earned playing for the Boston Red Sox or the $20 million Shaquille O'Neal made from the Miami Heat didn't happen on the golf course.

It came from a pen in a boardroom at PGA Tour headquarters back in 1983.

Long before the Tiger Woods phenomenon fueled a series of giant television contracts that pushed the tour's total prize money from less than $20 million in 1983 to nearly $250 million in 2005, former PGA Tour Commissioner Deane Beman devised a program that would reward the most successful, consistent -- and loyal -- tour players with a significant stream of deferred income.

How significant is this potential nest egg for the players? Very significant, but only if they're having a prosperous career.

By the time Singh turns 60, in 2023, the deferred money from his record-setting 2004 season could have mushroomed into nearly $4 million in extra cash in his pension account. And if Singh meets a complicated series of performance and activity benchmarks, he could be sitting on a fund worth tens of millions of dollars. Meanwhile, Ramirez will collect about $150,000 yearly in pension if he plays 20 seasons, and Shaq will have to get by on the $55,000 a year he'll receive if he plays 15 years.

What makes the tour's pension program the most lucrative in sports? It isn't financial alchemy or some kind of elaborate pyramid scheme. It's more the power of compound interest.

The fundamental difference between the PGA Tour's plan and those of the other sports leagues such as the NFL, NBA, Major League Baseball, and the NHL is in the way the tour's plan is funded. Player payouts in the NFL, NBA, MLB, and NHL pension programs come solely from television revenue invested by the league. Those programs are designed to be safety nets for players who didn't earn large salaries or have long careers. A baseball player needs just 43 days of major league service to qualify for a $34,000 annual benefit. The NFL's plan covers every player who played at least four seasons in the league, and the NBA covers those who played at least five. The NHL pays a pension to players who played in at least 160 games.

The PGA Tour's program works more like a deferred-compensation plan than a pension. Funds for the pension -- $28.5 million out of a purse of $250 million in 2005 -- are allocated by the PGA Tour Policy Board from the tour's annual revenue. "Players give up compensation in the short run for these programs to be as good as they are," says Beman, who was commissioner from 1974 to '94. "There's always a negotiation about how much you can do in terms of funding it, but the players recognized this was the best for everybody. It's also an advantage not to be dealing with a player-union situation, like the other leagues."

How the PGA Tour plan works

Essentially, a player's pension account is seeded with money he would have otherwise collected by making cuts when he was playing, augmented by performance and participation bonuses and then distributed to him after he retires. However, the player has to maintain a certain level of performance to collect all of the cash at retirement. The player-contribution component, coupled with a dramatic increase in purse sizes during the last 10 years, has made a core group of high-achieving tour players wealthier than they already are -- at least on paper.

"It's just a better way to pay people," says Beman, who devised one of the first IRS-approved deferred-compensation plans while working in the employee-benefits business in the 1960s, before his PGA Tour career. "From a player perspective, it's good to divert as much money as possible -- that's pretax money growing in the pension account. The NFL player is taking his money up front and asking the league to subsidize his retirement later on. He's also got an agent involved, who is interested in getting as much money up front as possible. PGA Tour players are taking a longer-term view."

Tour players bank money in their pension accounts three ways:

1. For each cut made during the season.

2. Performance in each of three schedule segments during the season.

3. Position on the end-of-season money list.

At the beginning of the year, the PGA Tour Policy Board designates a pool of money for each element of the pension program, to be divided among the players who qualify by their performance.

The original component of the pension is the cuts plan, which is open to voting members of the tour who play in 15 or more official events in a season. Each cut made during the season has a pension-contribution value. For 2005 the contribution per cut is $3,800, and that figure doubles for every cut made after the 15th. The catch is that a player must play a minimum of 15 events as a voting PGA Tour member for five seasons before he's fully vested in the cuts element of the plan -- making the fifth season of membership the magic number for every tour player.

"The concept of this program was that it should be helpful to the players who made the tour what it is," Beman says. "It's designed to get marquee players to play more. It's not a reward for guys who are just trying to make it."

To boost the original cuts-made plan's ability to motivate players to enter more events, the tour added the player-incentive component in 1998 and the deferred-compensation bonus program to the pension package in 1999. The player-incentive plan breaks the schedule into three segments. Each segment has a pension bonus pool -- $2 million in 2005 -- that is distributed roughly the same way as prize money from a tournament. The player who earns the most prize money in a given segment receives 18% of the bonus money in his pension ($360,000 in 2005), the second-place earner receives 10.8% of the pool, and on down the list. To collect 100% of his incentive bonus money, a player has to play 100 official events over four years or play in each official event on the schedule at least once in a four-year stretch. He can also increase his vesting percentage by increasing his "historic playing average" -- the average number of tournaments he plays in a year -- over four seasons.

"You can see how it's an incentive for the younger guys to bump their fall schedule," says Nick Price, who became fully vested in the original component of the pension plan in 1991. "When I was playing a lot in the late 1980s and early 1990s, the money I made on the golf course far outweighed what I could do in my pension, which took some of the incentive out of playing a lot of events. But for a guy like Charles Howell III, there'll be an actual comparison between pension money and career earnings. If they manage it correctly -- not like Social Security -- guys in their mid-20s who have a career like mine are going to have $30 million or $40 million in the pension. That's not too bad, especially compared to the early 1980s, when we didn't have anything."

The last segment of the plan is a straightforward bonus for a player's finish on the money list. In 2005, $10.5 million will be distributed among the top 150 official money-winners, with the money leader receiving $100,000. That money is immediately fully vested in the program.

By any measure, Singh's 2004 season was a great one. He won nine times and broke the tour's season earnings mark by almost $2 million. But in terms of pension contributions, it was the greatest in the history of the tour. Not only did Singh earn segment and money-list bonuses, but he also played in 29 events and made 28 cuts. The tour does not disclose player pension figures, but Singh's pension take from 2004 can be conservatively estimated at nearly $1 million -- more than $700,000 in fully vested segment bonuses, $100,000 for his position on the money list, and $155,000 simply for making cuts -- just one more reason to call him the hardest working man on tour.

Not everyone benefits

The Tour's plan, however, draws a very distinct line between the haves and have-nots. For example, Stan Utley has played in 196 PGA Tour events since 1988 and has made 80 cuts. He won the 1989 Chattanooga Classic on the PGA Tour and three other events on the Nationwide Tour. And unless he thrives on the Champions Tour starting in 2012, he'll be on the outside looking in. Players who did not contribute to the plan -- either because they did not play enough seasons, or because the prize money they earned came before the plan was started -- are pretty much left out. "The pension doesn't even enter my thinking," says Utley, 43, who has earned nearly $675,000 in career money. "I just looked at my last statement, and there's nothing in there. I pretty much know I'm on my own when it comes to my retirement."

For the generation of legendary players -- including Arnold Palmer, Jack Nicklaus, Lee Trevino, and Gary Player -- who missed out on the regular tour's huge potential pension payouts because they were active before the program was formed, Beman created two "amnesty" programs. The first one was the Champions Tour, which made millionaires out of players like Orville Moody, who hadn't had a lot of regular tour wins, and multimillionaires out of the likes of Trevino, Ray Floyd, and Dave Stockton. The second was an offshoot pension plan for senior players, which is based on the number of top-48 tournaments a player accumulates. Palmer and Nicklaus won't be able to blow off course-design work and live on the pension money they'll collect from the senior version of the plan, but they will get some payback for decades of brand-building in the name of the tour.

The tour manages its pension much like a corporation would a 401(k) or deferred-compensation plan. The money a player earns in the program stays on the PGA Tour's books until it is disbursed, at age 50 if a player has retired from competitive golf, or at 60 if the player stays active on the Champions Tour. Rank-and-file players don't have any control over the amount of money allocated to the pension program each year or how the pension money is paid out -- in equal installments depending on when the player retires. However, they can control the mix of investments in their accounts, choosing from a menu of 12 Policy Board-vetted alternatives ranging in risk from equities to fixed-income bonds.

Players can request from the tour's finance and administration department customized pension projections that take a number of factors into consideration -- competitive performance, length of career, market performance, the level of contribution from the tour, and the investment choices a player is making in his plan. "Assumptions on competitive performance and performance over time are critical ones when you make projections," says Ron Price, the PGA Tour's chief financial officer. "That's something we do routinely with players, getting input from them. We might go best-case scenario, likely case, worst-case scenario with a player, to give him an idea of where he is retirement-wise."

According to Joe Ogilvie, who earned an economics degree from Duke before qualifying for the tour in 1998, the tour's management of the plan has been first-rate. "It couldn't be easier to research and change allocations," says Ogilvie, who finished 49th on the money list in 2004. "Charles Schwab runs the program for the players, and the tour hires an outside consultant to pick the mutual funds we can invest in. They just switched us out of one S&P 500 Index fund and into another because the fees were 15 basis points lower. That's good service."

Ogilvie estimates that a player would need to play 12 years, making 12 to 15 cuts per year and staying in the top 125 each year, to be fully set up in his retirement. "Obviously, set for some people is different than set for others," Ogilvie says. "If we have go-go years like we did in the 1990s -- which we probably won't -- that could halve that time frame. But I know some pretty smart people on Wall Street who say if you get a chance to lock in 6% for the next decade, you should take it in a heartbeat."

Perhaps the biggest risk to the pension plan's rate of return doesn't have anything to do with the investment options players pick. The tour's level of contribution to the plan has grown right along with purse sizes -- an increase of more than 1,100% since 1983. But the era of huge increases in the size of the tour's television contract, and the related jump in prize money, is probably over. "We're seeing a leveling off of the television contracts in every sport," Beman says. "Golf isn't any different. But the basic underlying value of what golf brings to sponsors is still substantial. There's value there, and that will drive the program going forward."

By Matthew Rudy

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