Boeing's Costly Pension Breakthrough

Trying to buy labor peace, the aerospace giant retains its traditional pension plan instead of a hybrid option favored by FedEx and others

Call it pension envy. Unionized machinists have forced Boeing to give in on one of the most contentious issues in their contract talks, a company demand to scrap a traditional pension plan for new hires and push them into 401(k)-like plans.

The move, coming in a second round of negotiations on Aug. 26, could prove costly to Boeing (BA). The aerospace giant will likely remain stuck with a plan that is fading fast all across Corporate America. And, for now at least, Boeing will lose a chance to modernize the pension scheme, perhaps with an alternative that backers say offers the pluses of a traditional plan and a 401(k) with few of the minuses of both schemes.

Strike still possible

Boeing officials, looking down the barrel at a potential strike vote by the International Association of Machinists on Sept. 3, yielded for now to the union's demands to keep a traditional pension plan. The company must manage some $46 billion in pension liabilities, making sure to chip in enough to cover shortfalls in lean years and grappling with the uncertainties of how much it must contribute each year.

For just those reasons, Boeing still intends to scrap the traditional plan for new nonunion workers, effective Jan. 1, while offering them an enhanced 401(k) plan, says spokesman Timothy Healy.

The pension demand was a big hurdle to reaching an agreement with the machinists, but it wasn't the only one. The company and union must still agree on Boeing's desire to cut retirees' medical benefits and on such issues as pay. The union could go on strike on Sept. 4 if no agreement is reached.

401(k) popularity grows

Boeing, like other large employers, is under tremendous pressure to rein in pension costs. And it's not alone in fleeing from traditional pension plans. One of the options that company officials considered, according to a spokesman, was a sort of hybrid pension that looks a lot like traditional pensions but with some important twists.

Companies ranging from package shipper FedEx (FDX) to SunTrust Banks (STI), one of the nation's biggest banking companies, have begun offering these so-called cash-balance plans. Like the old-fashioned pension, these savings schemes offer guaranteed payouts, but also provide some of the benefits of a 401(k). Workers can take gains with them if they quit early, for instance, and can check in and see how their nest eggs are faring.

Benefits consultants say the shift toward such plans is modest but growing. As federal pension law has cleared up some technical issues that have bedeviled the plans, they have become "viable options," says Bob Leone, a principal at Hewitt Associates (HEW). Indeed, some 18% of 1,000 midsize and large employers recently surveyed by Hewitt now offer such plans, triple the share that did so in 1996. (Of those companies surveyed, 21% retain traditional, defined-benefit plans, down from 73% in 1996. The vast majority, 61%, have 401(k)-like defined contribution plans, up from 21%.)

Better blend?

FedEx on May 31 capped its traditional plan and switched employees over to a hybrid that it had set up in 2003. The package-shipping giant also is keeping a 401(k), saying the dual offering gives employees more choice and control. FedEx officials say accounting rules on the traditional plan require them to keep certain minimums, and the amounts needed can fluctuate, creating too much volatility and risk for the company. Boeing officials have echoed those arguments.

Consultants who pitch the new hybrid plans say they give companies more stability than traditional plans. The hybrids generally cost companies just as much as traditional plans but boast different payout schemes that make for more predictability. Instead of being obliged to make monthly payments to retirees for the rest of their lives, for instance, companies typically pay out single lump sums—the "cash balance"—or provide annuities for fixed periods.

For many employees the hybrids can remove a lot of the stomach-churning unease that comes with 401(k) plans. Markets rise and fall, as anyone who has kept their 401(k) retirement money in stocks this year knows too well. "The downside is the risk I'm taking if the market goes south," says senior consultant Alan Glickstein of benefits adviser Watson Wyatt Worldwide (WW).

With hybrids, companies do the investing and promise relatively modest annual returns to employees, generally about 5% a year in gains. Employees don't direct the investments, as they do with 401(k) plans, but they get the benefits of smart pension fund managers and the economies of scale found in multimillion-dollar pension funds.

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