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Your Employer Is Ruining Your Retirement

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Editor's Note: An updated version of this article reflects a difference in the timing of Sears Holdings’ announcement. We apologize for any confusion.

Once upon a time, after you put in a long career, you could count on your employer to help you retire comfortably. That era is no more. Now, you have to do everything you can to protect yourself from the moves that many employers are making right now.

Taking away the carrot
As part of their total compensation packages, most employers offer benefits to entice workers to hire on with them. When you've received multiple job offers and are trying to decide among them, a good benefits package that includes a pension plan or a matching contribution to your 401(k) can mean thousands of extra dollars in value every year. That can make a huge difference in which job you decide to take.

Unfortunately, many employees don't realize is that their employers can change their minds about those benefits at pretty much any time. Consider some of these major hits to employees' retirement prospects:

  • Kraft Foods (NYSE: KFT  ) , HSBC (NYSE: HBC  ) , and Time Warner (NYSE: TWX  ) have all frozen their pension plans this year, leaving hundreds of thousands of employees facing diminished benefits.
  • Some employers are still cutting back on matching contributions to their employees' 401(k) accounts. Although many of those cuts in 2008 and 2009 turned out to be temporary, Honeywell (NYSE: HON  ) and Exelon (NYSE: EXC  ) rank among the companies that recently cut their employer matches.
  • Employees who retired with the promise of receiving medical benefits are seeing them taken away. In 2005, Sears Holdings (Nasdaq: SHLD  ) announced that it will no longer pay anything toward early retiree medical benefits, while Sunoco (NYSE: SUN  ) has taken away retiree medical benefits entirely.

These moves can have a huge impact on your current and future retirement plans. Because pensions generally pay their highest benefits to longtime employees, pension freezes can especially hurt. They limit the number of years of service you're considered to have worked under the plan, leading to a much lower payment when you retire. And with medical costs constantly on the rise, medical benefit limitations can mean the difference between retiring and having to continue to work.

Between a rock and a hard place
Unfortunately, this problem won't go away anytime soon. In fact, public employers, once considered havens for attractive benefits, could be the next problem areas for pensions. State and local governments are facing huge budget crunches, now that the recession has dramatically reduced their revenues. Meanwhile, public pension programs are severely underfunded. It's likely that the pension freeze and benefit reduction trends that private employers have seen for years will soon migrate to the public sector as well.

That may seem colossally unfair, especially to those workers who argue that the entire reason they took lower-paying jobs was due to benefits that are now being taken away. But as long as unemployment hovers around 10%, employees don't have the bargaining power to do much about it. Even labor unions are being criticized for wasting money on lobbying efforts and political campaign contributions, rather than providing direct assistance to their members. Without strong advocates, it's an employer's market for labor, and benefits are the easiest thing to cut.

Take charge of your future
Look at weaker job benefits from two perspectives. As an investor, reduced benefits cut costs in the short run, and as long as the weak economy keeps competition for labor at a minimum, those cuts shouldn't cause mass defections among workers desperate to hang onto any job they can get. So shareholders in companies that successfully manage and reduce their benefits costs should see higher profits (or smaller losses) as a result.

Personally, though, you need to take a look at your own benefits package. Figure out what benefits are guaranteed, and which could be changed at your employer's whim at a future date. Make the most of benefits like employer matching while they're available, understanding that once you get a match (and meet any vesting requirements), it's yours to keep. And most importantly, have a contingency plan that you can follow if your benefits change over time. That way, you won't feel the full impact of any future cuts in benefits.

Workers who've worked a lifetime for benefits only to see them cut are rightfully angry. But younger workers are learning that employers are only grudging partners in the quest to retire comfortably. If you're smart, you'll do everything you can to make that journey entirely on your own.

Many people are woefully unprepared for retirement. Selena Maranjian exposes the 50% risk that most people ignore.

Fool contributor Dan Caplinger has always milked his benefits for all they're worth. He doesn't own shares of the companies mentioned. Motley Fool Options has recommended writing puts on Exelon, which is a Motley Fool Inside Value choice. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy rises from the ruins of Wall Street corruption and despair.


Read/Post Comments (3) | Recommend This Article (12)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 21, 2010, at 5:18 PM, jimratflorida wrote:

    There is a huge disconnect between public - and private-sector salaries and benefits.

    Time was, if you took a government job, you took less money, but had good job security.

    This has now gone to the point where the best pay - and the best benefits - and the best retirement plans are in the public sector.

    This is a victory for the unions. Politicians do not have the same incentive as the private sector to stand and resist these demands. After all, it's not their money. Additionally, union employees also are voters, and no politician wants to piss off a group of voters.

    This is going to have to change. Too many government agencies are broke...as taxpayers, we can't afford a lot of $100,000 firefighters and police.

  • Report this Comment On June 22, 2010, at 10:40 AM, amt77 wrote:

    I think you're a bit slow reporting on this loss of benefits phenomena. My husband and I both lost our 401K match back in the downturn after 9/11. Smaller employers (1000 or less) cut the match and then never brought it back. This gets compounded by employers giving up on the "full-time benefited" employee concept altogether, which also blossomed in the 2000's.

    Many smaller companies only care about getting their bottom line in shape in the hopes of getting bought by a larger publicly traded competitor. Then those publicly traded companies only care about their quarterly earnings reports, which leads them to do some pretty questionable things. Then when we only have large publicly traded companies - taxpayers have to bail them out when they make mistakes to protect the shareholders - because they are too big to fail!

  • Report this Comment On June 24, 2010, at 8:00 AM, sails2 wrote:

    I have been retired for 11 years and am now on medicare. My employer first increased the portion of health and dental insurance I had to pay and then put a cap on it. Where I used to pay the entire bill with one check I now pay monthly. Not a bad deal but not the one I was promised. The employer part of dental insurance goes away next year.

    Now is the time for all reasonable people to question the link between medical coverage and employment. With 10% unemployment do we have a problem? How many people do not consider going off on their own to start a small business because of benefits? How can we be competitive with a $600 cost advantage to a Canadian plant which produces the same car as our plants in Detroit --- the Canadians do not link medical coverage with employment.

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Dan Caplinger
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Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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