Do you want to work at Wal-Mart when you are 80?

1. Do you want to work at Wal-Mart when you are 80?

2. 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?

3. 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.

4. The Current State of Pension Emily Brazil Hunter Lewis Jennifer Margoles Joel Desmond Moskal Kara Myers Jed Staufer

5. Overview • Background and Traditional Pension Systems • Current State of Pension Systems • Application of a Modern Pension Plan • Q & A

6. 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.

7. Main Types of Pension Plans • Defined Benefit Plan • Defined Contribution Plans

8. Defined Benefit Plan • Traditional style of pension • Considered nearly obsolete • Used by companies like General Motors

9. 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.

10. 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.

11. 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.

12. 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.

13. Current State of Pension Plans Issue 1: Under-Funded Pension Plans

14. 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.

15. 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

16. 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?

17. Case cont. • Capital Expenditure accounts • Cash reserves • Cash from earnings for the current year

18. 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

19. 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.

20. 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.

21. Current State of Pension Plans Issue 2: Corporate Scandals

22. 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.

23. 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.

24. 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.

25. 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.

26. Corporate Scandals • Parties that were affected by these debacles include: • Individual company pension participants • Several state pension funds such as California • Individual investors

27. 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.

28. The New Plan Defined Contribution Plans

29. 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

30. 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.

31. 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

32. 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.

33. 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.

34. 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.

35. 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.

36. 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.

37. Plan now or this is your future.

38. Questions or Comments?