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Their Risks Are Your Risks
As employers continue to confront the bottom-line impact of the cost of their employee benefits and employees struggle to prepare for more expensive retirement needs, they are both discovering that their interests may be inexorably linked. Neither side of the labor balance may have enough money to manage their respective retirement risks successfully.
In mid-April, General Motors Corp. stunned Wall Street by announcing its worst first-quarter financial report in 13 years, a loss of $1.1 billion, compared with a profit of $1.3 billion for the same period last year. While most of the losses were attributable to the struggling automotive operations, the company also blamed rising health care costs for present employees and retirees. Retiree costs are particularly controversial as they have been a component of ongoing problems between GM and its retirees for a long time. Only six months before the recent earnings announcement, the company announced a plan to require retirees to contribute more to medical costs as a way of offsetting more than $6 billion in retiree medical costs in 2004.
While explaining the earnings report to analysts, GM executives confirmed that one way to offset the losses would be to tap a $20 billion reserve the company set aside for retiree medical costs in 1997. While they did not cite pension plan costs this time, GM's bad quarter also follows last year's announcement of general pension obligations of more than $100 billion. While GM, its employees and retirees may have the largest and most obvious problems meeting their respective needs, they are certainly not alone. Employee benefits experts and the most recent research confirm a national problem. James Klein, president of the American Benefits Council in Washington testified before the Senate Special Committee on Aging in April, describing the role of employer-sponsored retirement plans in increasing national savings for retirement. "Retirement savings through employer-sponsored plans is the one bright light in an overall dismal picture of how Americans save," he said. He also noted that the retirement problem was not limited to pensions. "One of the greatest challenges to the retirement income security is the continued rising cost of health care coverage which absorbs available resources for employers, workers and retirees." CONCERNS CONFIRMED A new survey of 200 corporate financial executives by Hewitt Associates in Lincolnshire, Ill. confirms the widespread concern. Sixty-five percent of respondents said their top priority for the next two years will be to identify ways to control the growth in retirement costs and almost half said they would focus on reducing pension cost volatility. Fifty-nine percent said they plan to step up efforts to educate their employees about the need to save for retirement. Only 30 percent of financial executives said they are confident their workers will retire with sufficient retirement assets, yet more than 70 percent said they believe their employees' ability to retire is connected to their organization's ability to manage its workforce effectively. Whether they like it or not, employers, employees and retirees have much in common, notably, insufficient resources for the future. LEN STRAZEWSKI, a professor and benefits expert, is the benefits columnist for Risk & Insurance®. June 1, 2005 Copyright 2005© LRP Publications |
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