Corporations

The landscape of work has radically transformed over the past 50 years and is accelerating even faster every day. No doubt technology's advancement is one side of the equation. Just compare the Fortune 100 list from 1980 versus the one for 2020 and you will see the difference. It’s not surprising given the shift. We are moving fast!

Another money shift began to occur within the corporate world. Prior to 1978, the retirement offerings that many companies had came in the form of a pension. Now, pensions come in all shapes and sizes and many are not complete income replacement. However, the idea was that you worked a long career for a company and they would take care of you and give you a monthly paycheck when you retired from the company. Almost ⅔ of companies still provided these in 1980.

So what happened in 1978? That was the advent of the 401(k) something most of us are familiar with and think of as the primary retirement account. The advent of the 401(k), which is technically a section of tax code, brought about a radical shift for corporations and employees. This was Great for companies, and I am skeptical how great it has been for employees. This shift and the continual move away from pensions - only about 4% of companies offer them any more - is the key movement away from individuals that companies made in regards to retirement.

But I love my 401(k) and I am so glad to have it!

We should all be grateful for them but the sub-50 generation has no real comparison since that’s all we’ve had as adult workers. What we need to understand more deeply is why the 401(k) came about and how it massively changed the financial game for businesses - especially publicly traded companies. It’s not complicated to see what happened and why but you first must understand that a pension sits on the liabilities side of the business. Think of this as a debt or obligation to pay. As people live longer that obligation only becomes bigger and bigger. Think of it as a huge ball and chain tied around the company’s neck.

On the other hand, a 401(k) does not. It actually works like an asset for a company since there is no obligation other than a possible match and it is a tax write off for the business. This is important to understand because companies are valued based on the relationship between their assets and liabilities. Companies with large pensions cannot show the type of profitability they may like, the cash flow and reserves they may like or be valued as high because of the large obligation. However, you can never completely eliminate a benefit, you need to replace it with an alternative so the workforce doesn’t rebel.

So, In The 70s there was work done to create an alternative type of account that serves a similar purpose of providing for retirement but did away with the liability. And in 1978 you got the 401(k) and companies and us as employees rejoiced for our 5% match.

The timing of this comes right before the Reagan administration of the 1980’s. The stock market entered into the American consciousness in ways it never was before. Stock price, valuation and growth all followed. For example, The S&P was around $100 in 1980. Businesses need to be ready for the ‘new world’ of the American and Global economy or be left behind. Corporations needed to dump liabilities and the largest one being the idea of a pension. Pensions have generally been seen as positives by people but in the scenario of looking strictly at the numbers, they had to go.

I do not want to be completely negative about this shift. In general, Pensions had to go away because they did not fit the new world and the new economy ushered in by the 80’s. The days of getting a job at 18 or 22 for a company and never leaving until retirement was part of the old world. We needed and still require a ‘portable’ retirement system and the 401(k) makes that available when combined with individual retirement accounts (which began a few years earlier in 1974). Currently, people are changing jobs every 2-5 years and it’s estimated that those just entering the workforce will have 5 or 6 careers while those on the older end of the Sub-50 will have about 3 changes. This has only accelerated in the past decade and will continue. In addition to that, the rise of the ‘gig economy‘ requires individuals to set up their own futures since we are all becoming less and less dependent upon corporations for our future.

When you put this all together, it is easy to see the dynamic of why and how corporations have moved further and further away from being a significant part of an individual’s retirement plan in a significant financial way.

There is a distinction I want to make at this moment, offering plans and often being required to is not a significant contribution to retirement for individuals. Offering Plans cannot be equated with “retirement is taken care of.”

I cannot tell you how many people have told me, “I have a 401(k) so I am set.”

The offering of a ‘retirement plan’ is never a substitute for a RETIREMENT PLAN. While I do not believe what is currently being done by corporations is not nearly enough of what they could do for their employees, we cannot place responsibility at their feet. That is not their primary role nor should we ever expect that of a business.

However, as the main economic engine of America and a place where most adults will spend much of their adult years, it cannot be discounted the potential that corporations have in regards to providing further economic value for their employees.

For corporations, their sacrifices tend to be economic in nature which can have a negative result on earnings, profits and share price (which I argue is a businesses #1 function). The first is would be seen in the increase in contributions towards employee retirement plans. Would a higher match on a 401(k) be added incentive? Of course! Imagine company A offers a 5% match and company B offers a 10% match? Which one are you inclined towards as an employee? It did require a 5% bump in expense, but that is also a 5% drop in tax liability for the business.

I would be very curious to see if a 10% match would start to exponentially increase the savings rates of employees. I also know that the math on a 10% match would radically influence shrinking the gap in retirement savings and get people closer to being off the road to the Future Poor.

Broader employee incentives are key to thinking about different types of things businesses can offer. Many types of benefits including life insurance, disability, come in addition to health care and retirement plans. Each of these benefits can provide reduced cost, easier access and knowledge to employees.

In addition to being exposed to broader benefits, financial education is one way employers can provide a free service to their employees and show deep care for them as people beyond the walls of the office. Most employees have no idea what they should do when signing up for their 401(k) - many don’t sign up even if they could get a match! Leaving that fiduciary responsibility in the hands of the HR department leaves much to be desired.

I have said that I would come to any business and go over their 401(k) plan, help employees sign up and select an appropriate investment option for them as a complimentary service. I am sure I am not the only financial professional willing to do that! Broader financial education is also a benefit that can be offered complimentary. It may require giving up an hour of employee work time to go to a valuable seminar on a financial topic. The workplace is a semi-captive place where value additive activities and ones that benefit the whole person are becoming more and more the norm.

Businesses in America create the money and opportunities available to us. The numerous benefits from wages to production of goods have effectively reduced absolute poverty in our country in the span of 100 years and that is a remarkable feat. Now, as that central economic generating force, there is a new poverty to be tackled and it most likely already employed at the companies that can make the largest impact.