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Legal Landmines for Employee Benefit Plan Sponsors During Bad Economic Times

Legal Landmines for Employee Benefit Plan Sponsors During Bad Economic Times

Employee Benefit Plan Review

September 17, 2009

“Breaking Up Is Hard to Do” is not only the name of a popular song from the 1960s, it also describes the feelings of most employers who, because of competition, business costs or our current bad economy must reduce the size of their employment budget.

By the time an employer has to “downsize,” the economic factors driving that decision have already done their damage. The question for management is ordinarily not whether a reduction in force or a cut in employee benefits is necessary but, rather, how to do it.

Navigating around employee benefit landmines is difficult even in good economic times. It has now become a truly perilous undertaking due to the dramatic declines in retirement plan asset values and the government’s increasing scrutiny of employee benefit arrangements.

DRAMATIC DECLINE IN RETIREMENT PLAN ASSETS

How bad is it?

By the end of calendar 2008, old fashioned pension plans (technically called “defined benefit plans” by those practicing in this area) for Fortune 500 companies had accumulated $1.4 trillion in liabilities and had just $1.1 trillion in assets.

Just one year earlier these same Fortune 500 plans had a $63 billion surplus. 2008 ’s stock market decline simply decimated plan asset values.

For example, the average defined benefit plan experienced a 24 percent decline in the value of its assets during 2008. At the end of calendar 2007, 46 percent of pension plans had funding levels of between 90 percent and 110 percent and only five percent of plans were funded below 70 percent.

Today it is estimated that only five percent of pension plans are funded above 90 percent. Over 60 percent of pension plans have funding levels below 70 percent. 401(k) plans have fared no better. By the end of calendar 2008 the average 401(k) plan account balance was down by 26 percent.

Sponsors of defined benefit plans are thus reeling from a double whammy – large negative investment results occurring at the same time the federal government is mandating increased plan funding.

UNFAVORABLE DEMOGRAPHICS

In the overall U.S. economy, the ratio of active workers to retired workers has been plummeting for many years – it now stands at about three active employers to one retiree compared to 16 active workers to each retiree in 1950. At some companies like Ford and Chrysler, the ratio of active workers to retirees has fallen from six to one in 1950 to one to one now. At GM there is now only one active employee for every two GM retirees.

Beyond demographic factors, the problem is compounded by the fact that the U.S. economy is shrinking. In May 2008, the U.S. unemployment rate stood at 5.5 percent. It is now officially 8.9 percent. Since the recession began in December 2007, over five million jobs have been lost. The Department of Labor estimates that as of April 2009 almost 14 million Americans are out of work.


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