Some interesting details and facts
FedEx moving from traditional pension plan to 401K Feb. 28--Tens of thousands of FedEx Corp. workers got word Tuesday that their pensions will be capped as the company moves into the brave new world of employee-managed retirement planning.
Beginning June 1, 2008, FedEx will stop funding its traditional pension program, providing instead a 3.5 percent match to employees' 401(k) contributions.
Any benefits already accrued under the traditional pension will be payable monthly at retirement.
For most workers, the company will also fund a
cash balance account -- which FedEx calls a
portable pension account --
paying 5 percent of salary each year for its newest and youngest workers and up to 8 percent for more senior people.
These accounts will pay a fixed rate of return -- based on interest rates -- giving employees a way of knowing long before they retire what their base-line benefits will be.
Long term, FedEx said it expects to spend the same amount on the on the new programs as it would have spent under its current plan.
The changes affect 34,000 employees in Memphis and more than 170,000 nationwide.
"We have been studying these issues closely and actively participating in the debate about retirement program reform and believe, that given the circumstances, this is the right thing to do for our employees," said Alan Graf, executive vice president and chief financial officer.
Tuesday, he answered questions from employees who learned about the change in a interactive noon broadcast on FXTv, the intra-company television station it uses to broadcast news to employees worldwide.
"The questions were very good," Graf said. "The fact of the matter is before you couldn't know what your benefits would be. Now you can, and there is no pressure."
The company will provide independent advisers to help employees tailor plans. It also has created intranet portals so workers can try on various scenarios from the desks at work or computers at home.
A triumvirate of external factors are driving the shift, including changes in accounting rules, the newly enacted federal Pension Protection Act and the changing complexion of the American workforce, which is now not only more mobile, but increasingly inclined to be single and as a result interested in bequeathing benefits to someone besides a spouse.
Several companies have already made changes, including
IBM, after a contest at the U.S. Supreme Court, and
Hewlett-Packard.
Without changing its benefit structure, FedEx says it would have been forced to pay fewer benefits down the road and face volatility and risk unacceptable to the corporation and its shareholders.
Experts say the plan shifts retirement benefit risks from FedEx to its employees, pension and retirement.
"The risk in the old (defined benefit) plans is on the employer to produce benefits," said Robert Burleigh, principal in Burleigh Consulting Group, a Memphis employee benefits consulting firm.
If investments fell short, the company had to make up the difference, he said.
But in the PPA, benefits depend on plan investment earnings. In other words, Burleigh said,
"If you don't earn it, we don't make up the shortfall."
Veteran workers are hurt the most under the system, said John Ueleke, president of Legacy Wealth Management, a Memphis financial and retirement planning firm.
"If an employee stayed there a long time, then lived a long time, you become a big winner under the old plan," he said.
In the portable account, "
if you live a long time, then that risk of funding your retirement shifts to you and totally away from the company."
FedEx's PPA will offer the choice of a monthly or lump-sum payment and pre-retirement death benefits that can be paid to any designated beneficiary, including charities.
Employees will be vested after three years instead of the current five and will have no cap on the years of service.
The company's current plan does not accrue benefits after 25 years.
The 401(k), with its multiple new investment options, gives employees incentives to save. Together the plans give employees more power to imagine the lifestyle they want in retirement and plan accordingly, said Bill Margaritis.
"Now, if you want to retire and own a second home, you'll be able to plan for that. You'll see a statement that will tell you exactly where you are."
As the name implies, the portable accounts are designed to follow employees if they leave the company, a nod to today's more transient workforce.
"When Social Security was founded, people didn't want to plan their own futures. They wanted someone to manage that for them," said Howard Clabo, FedEx spokesman.
"That's not the reality today. People don't expect to work for one company for 40 years anymore. They want to take their retirement savings with them."
Ron Gebhardtsbauer, senior pension fellow at American Academy of Actuaries, credits FedEx for offering the PPA. Others, including IBM, have chosen only to fund matching 401(k) contributions.
"If you don't contribute to a 401(k), you don't get any match, and typically one third of workers don't contribute.
"This way, you make sure everyone some kind of a pension. In addition, it's also good for people who retire in the period like we have had in the last six years when the stock market was down."
Actuaries say the mix makes more sense because it doesn't put all the eggs in one basket.
Under the 401(k) plan, employees are responsible for managing the investments and, thus, take the risk.
"It behooves people to put as much away in your 401(k) as you can, regardless of how much the company matches," Ueleke said.
And, once you reach 401(k) limits, start adding to IRAs and other savings. "I don't think you can oversave."
By Jane Roberts and David Flaum
RETIREMENT PLAN HIGHLIGHTS:
--
Portable pension account follows employees if they leave the company.
--Benefits can be taken as lump sum or paid out monthly.
--Pre-retirement benefits can be paid to spouse or any beneficiary.
--No limit on years of service.
--Benefits vest after three years.
--Eligible employees will receive transition credits.
--
FedEx will increase 401(k) match from $500 a year to 3.5 percent of pay. An employee earning $50,000 would receive $1,750 a year.
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