means that the employer not only gets its contribution back; it also receives tax-free earnings on the money.
The vesting period can be stretched out in other ways. Some plans have required employees to be employed on the fifth anniversary of the day they were hired in order to vest, or on the last day of the fifth year. Wal-Mart employees must work for 1,000 hours in a consecutive twelve-month period to be eligible to participate in the profit-sharing plan. In 2009, 79,339 employees forfeited some of their benefit when they left.
The company then redistributed the money to the remaining employees “based on eligible wages,” meaning that some company contributions originally destined to aid lower-paid employees ended up benefiting longer- service, higher-paid employees.
Employers are perennially seeking to loosen the discrimination rules even further. They scored a big coup with Automatic Enrollment, a provision in the Pension Protection Act that became effective in 2007. This was touted as a way to improve participation. The theory is that poor participation rates are the result of worker apathy and that if they are automatically enrolled, it would solve that problem. It’s hard to see how it will help improve savings rates: Employees can drop out at any time, and they aren’t forced to contribute. At Wal-Mart, 8 percent of the employees who are considered participants in the retirement plan have nothing in their accounts.
What the new rules do, however, is give employers a free pass from the discrimination rules: As long as a plan merely offers automatic enrollment, employers don’t have to worry about passing discrimination tests.
Chapter 9
PROJECT SUNSHINE
AT AGE NINETY-TWO, John Wesley Galloway had beaten the actuarial odds for someone who’d spent a lifetime in hard labor in an iron foundry. For thirty years, he’d churned out parts for Kelsey-Hayes, the Rockford, Illinois, unit of a Midwestern farm equipment maker. Galloway had also beaten even more impressive odds: He’d survived more than two decades with his retiree health coverage largely intact, despite the relentless efforts of his former employer—and the current owner of the retiree portfolio he’s part of—to take it away. The company and its successors had used almost every trick in the book: legal maneuvers, illegal maneuvers, restructuring games, and deceit. Despite myriad attempts to whittle down the coverage for Galloway and his wife, Pansy, it was still intact.
But in 2006, and again in 2008, the plan administrator came up with a new trip wire. It sent Galloway a letter telling him that his health coverage would be canceled unless he could prove he wasn’t dead. If the company didn’t receive a notarized affidavit attesting to his continued presence on earth, the company, TRW, would cancel this coverage. Galloway had heard about IRS audits, but not death audits. This is just one of the many cost-saving maneuvers consultants have dreamed up in recent years to help their clients reduce the cost of their retiree health plans. Over the past twenty years, Galloway had just about seen it all. And there was more to come.
Galloway had never worked for TRW but, like millions of other retirees, including the Western Electric and AT&T employees who ended up with Lucent and the McDonnell Douglas retirees who ended up at Boeing, he was part of a portfolio of retirees that had passed through several owners’ hands. Not surprisingly, none of the owners felt like paying the retirees’ benefits, but they couldn’t cut the pension plans, which are protected by law. Yet the law protecting retiree health benefits wasn’t as ironclad as they thought. So this was where employers directed their legal firepower.
The quest to end Galloway’s retiree health coverage actually began at another company, Massey Ferguson, which bought the company he worked for, Kelsey-Hayes. Massey Ferguson isn’t a household name outside the Farm Belt, but for most of a century it was an almost iconic fixture in the Midwest. Founded in 1847 by a storied Canadian family whose descendants include the actor Raymond Massey, the company thrived until the agricultural recession in the 1970s dried up demand for its combines and tractors. The struggling company subsequently passed through many hands, all eager to extract a profit, at whatever cost. Conrad Black, the controversial Canadian businessman, gained control of the company in the late 1970s and added it to the portfolio of mining, media, and other businesses owned by holding company Argus Corp. The company didn’t thrive, and Black resigned as chairman of Massey Ferguson in 1979 and moved on to become a media baron and a prison inmate after being convicted of mail fraud and obstruction of justice.[16]
Black may have been gone, but he was replaced by a new chief executive cut from the same cloth: Victor A. Rice, a pugnacious Brit who claimed to be the son of a chimney sweep. In 1986, Rice changed the name of the company from Massey Ferguson to Varity (after his initials), bought a couple of companies, including Kelsey-Hayes, the one Galloway worked for, and began looking for ways to boost profits. The retirees were an obvious resource.
Soon after ascending the throne, Rice demanded a status report on retiree costs. The managers at the company’s Buffalo, New York, headquarters gave their boss what they assumed was good news. The pension was overfunded, and retiree health costs were “low.” But Rice wanted to cut retiree benefits anyway, even for the most elderly. A memo summarizing his “Philosophy & Objectives” made this clear. “The Company is not committed to maintenance of a retiree’s standard of living.”
Varity’s managers sprang into action, but nothing they suggested was dramatic enough to satisfy Rice. He told them to be a little more creative, and he didn’t let up. Under increased pressure to deliver a plan that would generate big savings, human resources manager Jill Wellman produced this snappish memo: “You have asked that I be inventive in coming up with a solution,” she wrote to her superiors a week before Christmas in 1986. “As far as I can determine there is only one solution” to save the company the most money, she concluded. “That would be the death of all existing retirees.” This happy outcome was, alas, many years in the future.
So Wellman’s memo went on to detail “more practical” but “not necessarily legal” solutions to help her employer meet its cost-cutting goals. One option: Establish “an offshore company responsible for the retirees but not accountable under United States law and have it go bankrupt and thus terminate the plans.” Another: Simply terminate the benefits, wait for the retirees to sue, and then drag out the litigation until the retirees gave up or died.
But Paul Pittman, a benefits and compensation manager, was worried that Wellman’s suggestion about provoking a lawsuit was risky. The company had promised the benefits to both salaried and union retirees. Varity’s lawyers prepared a “litigation risk” report, which noted that the company had promised the benefits. “Worse yet,” the report had said, “there is language in many of the contracts, booklets, and general descriptive material that implies a lifetime commitment. We would never succeed in court.”
Indeed, Wellman herself had drafted a form letter she called a “death letter,” which for years she sent out to widows of retirees, promising health coverage for life. A letter to one Flossie Pietila reassured her: “Mrs. Pietila, our health and dental benefits will continue for the rest of your life at no cost to you.”
Pittman suggested lying to the retirees. In his memo, he called this the “pleading” strategy. The company should tell retirees “that the burden of medical expenses amongst US retirees is unbearably high and would ultimately cause Varity Corporation to cease trading in the US,” Pittman suggested, “and that this would necessitate not only a loss of medical benefits, but also possibly the loss of some pension rights as well.” Although this wasn’t true, if the retirees believed it, they might agree to benefit reductions.
The company could also tell the employees and retirees that the pension plan was in bad shape, creating another burden on the company, Pittman suggested. He thought retirees would see through the maneuver, since it was widely known in the company that the pension plan was healthy, and even if Varity were to go under, he wrote, “the demise of Varity would not necessarily mean the loss of a pension.”
In short, he didn’t feel the company had much bargaining power with its retirees, but he was hoping it could fool the United Auto Workers, the main representative for Varity’s wage earners. “We could convince the union that unless we can reduce our retiree and employees costs we will be unable to continue to operate… thus creating significant hardship for their members,” he wrote in the memo.
If the union didn’t agree, it would be tough to cut their benefits, because they were backed up by negotiated contracts that companies couldn’t unilaterally change. So Pittman suggested a strategy he called “Creeping Take
