Do you want to work at Wal-Mart when you are

80?

Reality Check

How many people want to retire wealthy?

How many people plan on retiring wealthy?

How many people in this room have started planning for retirement?

The Numbers

To have a retirement income of 65,000 per year, you must have $3 million dollars at age 59 when you retire.

This requires $16,000 in annual contributions starting now.

If you wait until age 30 to start, those contributions jump to $33,000 annually.

The Current State of Pension

Emily BrazilHunter Lewis

Jennifer MargolesJoel Desmond Moskal

Kara MyersJed Staufer

Overview

Background and Traditional Pension Systems

Current State of Pension Systems

Application of a Modern Pension Plan

Q & A

Background Information

What is Pension?

Pension is an account partially or wholly funded by an employer or organization that is a source of income for retired employees.

Main Types of Pension Plans

Defined Benefit Plan

Defined Contribution Plans

Defined Benefit Plan

Traditional style of pension

Considered nearly obsolete

Used by companies like General Motors

Defined Benefit Plans These plans are basically a giant

fund that a company adds money to each year.

The fund consists of a mix of stocks, bonds, and cash that is supposed to appreciate enough over time that it can pay benefits to the retirees.

Defined Benefit Plans

The money that is added to the account is completely paid for by the company

This money is not earmarked for specific employees

Instead, calculations are made to determine how much money is needed to cover all pension liabilities for each year.

Mechanics of Defined Benefits

A specific dollar amount that is needed to pay all fiscal pension liabilities is determined.

This amount is then discounted back to the current time at a “discount rate” to establish how much money must be added to the fund.

Mechanics

This “discount rate” is mandated by the government, and it is the current 30-year treasury yield.

In the past, pension fund investments performed well, and treasury rates were high, which led to a lower net present value, and therefore less needed funding.

Current State of Pension Plans

Issue 1:Under-Funded Pension Plans

Under-funded Pension Accounts

The dot-com bubble burst in March of 2000.

Trillions of dollars have evaporated in the form of capital losses since 2000

Pension fund investments are part of this figure.

Under-funded pension accounts

These capital losses have compounded the damage when they are paired with the higher discount rate that has been used in the past.

Example

Case In Point

The fund needs $1,000,000,000 and only has $537,534,600

This shortage of $462,465,399 is still needed to cover the upcoming pension liabilities.

Where does the money come from?

Case cont.

Capital Expenditure accounts

Cash reserves

Cash from earnings for the current year

Example

IBM Defined benefit plan Under-funded by 2.3 billion for 2003

alone. Cash needed to fund pension account

will be taken from pretax income 2003 earnings per share may be

revised downward by as much as $.30 per share

Example General Motors

Fund worth $40 billion--twice the value of their market cap.

Currently their account is still $32 billion under-funded.

It needs 9 billion just to get through the next 2 years.

At least some funding will come from cash reserves.

Proposed Solutions Unfortunately, the solution that

keeps coming up, is to dissolve defined benefit plans completely.

The companies then want to adopt less expensive defined contribution plans, which will be explained in a few minutes.

Current State of Pension Plans

Issue 2:Corporate Scandals

Corporate Scandals

Enron and Worldcom were the two biggest corporate scandals in U.S. history.

Fraudulent activities led to billions of dollars in investment losses, including a handful of pension funds that collapsed, leaving retirees with nothing.

Corporate Scandals

Enron’s pension fund consisted of a 401(k) for employees that was comprised solely of Enron stock.

While the company was on the verge of disaster, executives told employees to buy up the stock so the price wouldn’t collapse while they all dumped their shares.

Corporate Scandals

When the truth about the company emerged, the stock price plummeted, and employees were locked out of their accounts.

All they could do was wait and watch as their nest eggs were crushed.

Corporate Scandals

Worldcom had a similar effect after reporting over $9 Billion in falsified earnings

Their market cap went from nearly $132 billion to nothing, and even more retirement accounts and pension funds were wiped out.

Corporate Scandals

Parties that were affected by these debacles include: Individual company pension participants

Several state pension funds such as California

Individual investors

Effects of Enron/Worldcom

After the scandals, almost all pension systems changed drastically

Concepts like diversification reared their head

Investments other than a company’s own stock were made available for employees.

The New Plan

Defined Contribution Plans

Defined Contribution Plans

New age pension systems Includes plans like

401(k) IRA’s Profit Sharing

Used by most modern companies like Level 3 Communications

Level 3 before Enron Prior to the Enron scandal, Level 3

pension was only offered in the form of a stock purchase matching program

The company matched salary contributions to purchase Level 3 stock, with a rolling 3 year vesting period

All employees that participated had their entire retirement in Level 3 stock.

Vesting A waiting or holding period for

benefits that is used as a strategic retention tool.

It promotes loyalty and longevity with a company

During the tech boom, retention was very difficult so rolling vesting was a good retention tool

Level 3 after Enron

The Enron debacle showed that the plan that was in place could leave employees with no money for retirement if the company failed.

The Pension director and investment committee developed an entirely new program to protect the employees.

Level 3’s New Pension Plan

Starting Jan. 1, 2003 a diversified 401(k) plan became available.

Employee contributions are put into one or several mutual funds.

Level 3 matches the contributions, and the money is used to buy units of the Level 3 Fund.

Level 3’s New Pension Plan

Employees have the immediate option to transfer that value to one of the mutual funds, without any penalties or fees.

The vesting period is still 3 years, but contributions vest 100% after 3 years.

Reasons for the Change

The new system protects the employees from loss if the company fails, while giving them the option to increase their ownership in the company.

A diverse list of mutual funds offers a portfolio structure for all participants, even those close to retirement.

Reasons for the Change

The new system allows the employees to decide how much to invest.

The company is only liable for matching contributions, not for paying retirees a salary from an account that can become under-funded.

Plan now or this is your future.

Questions or Comments?