Pension Risk Matters : Pension Risk News & Analysis : Pension Governance, Inc. : Pension Risk & Investment

 

As I strolled around the ancient ruins of Rome last week (one of the reasons I did not blog for a few days), I was struck by the reality that so little seems built to last. Notwithstanding the architectural glory of the Forum and Colosseum and other magnificent nods to history, our society seems focused on "new and improved." Discard the old. Bring in the new. While unlikely that benefit plan professionals strategically planned obsolescence years ago, one wonders whether retirement plans were ever built to last.

Someone recently asked me for my opinion about what he deemed the inevitable demise of defined benefit ("DB") plans. I countered "not so fast," asserting that changing workplace demographics are giving benefit design teams pause when considering whether to jettison traditional pensions. One investment committee member told me that their company engineers griped loud enough for management to reverse course and bring back the "old fashioned" but popular DB arrangement.

Unhappy 401(k) participants may likewise eventually vote by migrating to employers who offer or reinstate DB plans. Regulators are considering mandates to force employers to strengthen one part of a wobbly three-legged retirement stool. If individuals save little on their own and Social Security is on its knees, who else to pick up the slack but the private sector?

Don't laugh. If the Hula Hoop can make a resurgence with fitness buffs and even have its own magazine, why not defined benefit plans?

If and when these schemes return and are additionally augmented with new products (driven in large part by rules, regulations and laws), wouldn't it be great to create with permanence in mind? From a cost-benefit perspective, how much money and angst might be saved by doing it right the first time, whatever "right" turns out to be?

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According to the U.S. Department of Labor website, Labor Day occurs on the first day of every September and is "dedicated to the social and economic achievements of American workers." Over 100 years old, the holiday was first celebrated on September 5, 1882 in New York City, due to efforts of several labor unions.

Editor's Notes: Here are a few information sources about labor in the U.S. and elsewhere.

• "100 Years of Struggle and Success," AFLCIO
• U.S. Wage Statistics, Bureau of Labor Statistics
• Global Labor Statistics, International Labor Organization
• Global Labor Statistics, Global Policy Network

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According to 60 Minutes, some 80 million "millenials" are descending on Corporate America with aplomb. Tech savvy and self-obsessed, these 20 somethings are creating all sorts of challenges for button down HR departments. Key questions arise.

• What kinds of retirement plans make sense, especially if your workforce is an age barbell (with more younger and older workers and fewer in between)? 
• How does a manager motivate the "me" moguls in waiting? ("No, you won't be promoted by the end of the week.)
• What kind of financial education must a plan sponsor provide when the younger set overspends and believes in now power? According to acclaimed author of "My Reality Check Bounced: The Gen-Y Guide to Cashing In On Your Real-World Dreams," Jason Ryan Dorsey repeats what many surveys show. Few individuals under 30 think Social Security is a reality for them.
• For parents and their employers, how do you properly plan for looming retirement when grown-up children have returned home to nest for awhile?

Despite a job slump in some industries, the future is going to be grim for those employers who fail to recognize the coming demographic time bomb. Watch "The Age of the Millenials" (May 25, 2008, CBSNews.com) and learn about youth power in the workforce.

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Several days ago, I wrote about the link between employee happiness and the bottom line. I was pleasantly surprised therefore to read about a new study conducted by Auburn University professor, Dave Ketchen. Acknowledging the importance of incentives, his research results also suggest that "performance improvements are stronger when companies take a systematic approach to human resources rather than implementing one or two practices". He adds that "Executives need to adopt a strategic view of the human resource function and create sets of practices that reinforce each other."

In a related article, published in the August 2006 issue of Workforce Management, Dr. Theresa M. Welbourne echoes a similar sentiment about the strategic importance of the HR function. Author of "Human Resource Management: At the Table, or Under It?", Welbourne describes several of her studies which suggest that HR professionals are not given their proper due. This is a pity since "HR can, through various initiatives that reach out to employees, obtain employee insights and ideas about the business. HR can be the table because HR will have information about the business that no one else in the organization has at present. Employees are the stealth ingredient to creating a realignment culture. If you ask employees for information, and you use their input to realign, they are now part of the change, which means they are much more willing to move forward with the leadership team."

So what does this all mean in pension land? Plan design analysis should take into account immediate cash flow and earnings impact as well as trickle down effects that relate to employee productivity and retention. The expected demise of defined benefit plans may not come to pass if companies decide that attracting and keeping employees requires traditional benefits. Given today's article by New York Times reporter Jeremy W. Peters, labor shortages (and related cost pressurs) could nip defined benefit plan terminations in the bud. (See "Labor Costs Shake a Pillar of Fed Policy", September 7, 2006, New York Times.)

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Authors Dan Baker, Cathy Greenberg and Collins Hemingway write about successful organizations in What Happy Companies Know: How the New Science of Happiness Can Change Your Company for the Better. Using real-world case studies, their book "shows readers how to build a company where individuals at every level can apply their diverse strengths towards shared goals that are meaningful, positive, and profitable."

They offer that "motivated employees are the keystone to business success", suggesting that "companies built around people, positive mindsets and long-term goals consistently out-perform unhappy companies." (Click here for a short book review.)

Having just been interviewed by two journalists about significant changes to corporate pension plans and having met Dr. Dan Baker, author of What Happy People Know: How the New Science of Happiness Can Change Your Life for the Better, I started thinking about benefits and job satisfaction.

1. Has the flurry of headlines in recent months, chronicling frozen pension plans, layoffs, wage concessions, rescinded health care benefits and varying levels of job satisfaction, made it hard to implement a smiley face approach to work?

2. Accepting the book's premise that happy companies are profitable companies (something that makes sense to me), are they also generous companies in terms of new and/or continued benefits?

3. Do employees favor benefits that promote self-empowerment or prefer a more traditional, and arguably parental, approach?

4. How often do HR professionals break bread with C-level executives in order to design the optimal benefits mix that maximizes the happiness quotient while controlling costs?

5. Are certain types of workers happy even when the company's culture is sad sack central? (For example, there is interesting research that people who get more sleep are happier in their jobs.)

6. Can a company cherry pick happy individuals during the hiring process and thereby save (make) money in the long run?

7. Will rapidly changing demographics alter the way companies hire, train and retain and what role will benefits play?

8. Do employees react to news of rescinded benefits more negatively than never having had them in the first place?

9. Is happiness a function of how executives get paid versus everyone else, absolute dollars paid to executives, both or neither?

10. Are companies in certain industries happier, and if so, why?

I just ordered my copy of what looks like a very interesting book. If you know of research that addresses any or all of these questions, please let us know.

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Do you have happy workers? Productive workers? Loyal workers? So many news stories address the financial dimensions of THE pension issue. While important, ultimately the story is about the employees, isn't it? Ignoring tax considerations, companies provide benefits to protect human capital. Though this asset shows up nowhere on a company's balance sheet, it is nonetheless vital to profitability and growth. This is especially true for countries and industries where intellectual prowess determines success or failure.

According to a recent article in FORTUNE, the new paradigm urges managers to "hire passionate people". Citing research done by Christopher Bartlett of Harvard Business School, employees "want a sense of purpose". (See "Tearing Up the Jack Welch playbook" by Betsy Morris.)

In their best-selling book, First, Break All the Rules: What the World's Greatest Managers Do Differently, Marcus Buckingham and Curt Coffman regale the reader with countless suggestions as to how to manage people more effectively, including the need to keep people motivated.

Ironically, at a time when identifying and cultivating human potential is paramount, some leaders are still missing the mark. In today's Wall Street Journal, Erin White describes the disconnect between what companies say their performance reviews are supposed to measure versus what employees describe as their perceived opportunity set to advance and contribute. (See "For Relevance, Firms Revamp Worker Reviews".)

With so many companies shifting away from defined benefit plans, will there be a concomitant change in worker happiness? Do employees really choose a work situation based on benefits? Could plan sponsors be taking a short-term view without acknowledging long-term consequences? Do employees favor a parental approach or is individual empowerment the touchstone (in which case 401K and other choice-focused plans make perfect sense)?

There are no easy answers. People genuinely disagree about the role that benefits (quality, quantity, form) play in attracting and keeping good people.

One thing is certain, however. Corporations everywhere (U.S. and abroad) will be affected by changing demographics (recently described elsewhere in this blog). An oft-discussed dearth of skilled workers compels companies to think long and hard about the link between benefits and the bottom line.

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