Posted on: Sunday, May 27, 2001

Pension returns weaken as market slides

• Advice on recovering from portfolio shock

Advertiser Staff and News Services

It's probably no surprise that as the stock market skidded in 2000, pension plans suffered their worst year since 1987.

Nearly 25 percent of pension plans lost money last year, according to a survey of more than 400 plans by trade magazine Plan Sponsor. On average, plans posted a lackluster 4.1 percent return, well short of their 8.5 percent target.

But industry leaders say that despite the rocky market, and some losses, pension plans remain solid.

"Yes, last year was a bad year. But before that we had five tremendous years," says Richard Wendt, a principal at Towers Perrin. "Five good years, plus one bad year leaves pensions in pretty good shape."

The losses still may come as a surprise to some employees. And Hawai'i has not been immune.

Last week, the Employees Retirement System noted that the public employees' pension fund plummeted by $1.2 billion over the past nine months as the fund lost money in the sagging stock market and paid out record amounts in retiree benefits.

David Shimabukuro, administrator of the Employees Retirement System, said the pension fund is sound, and pensioners' benefits are safe. The pension fund has about 90,000 members, including 29,000 retirees.

And the ERS is not the only plan to feel the effects.

Financial planners in Hawai'i say Island investors have certainly felt the shock when reading quarterly statements from their stock-related retirement funds, including 401(k) plans.

Naomi Oye, a Honolulu-based financial planner, said dropping stock prices have left many investors with a "very painful lesson" in retirement finance. But she coaches them to emphasize their long-term goals, not their immediate anxieties.

Her opening comment: "Put your statements away and let's talk about when you're planning to retire."

Oye said she pulls out charts tracking the stock market's overall gains during the last 20 years to demonstrate to clients that, usually, the best bet is to stay with their investments for the long run.

"I tell them we have to keep our focus," she said. "The rich get richer because they can afford to wait. They don't panic."

Noting that every investor's case is different, Merle Tanabe, a senior partner with the Bishop Group of Honolulu, said people nearing retirement are more likely to need advice on restructuring portfolios to ensure certain levels of income.

But he also pointed out that recent market rallies have helped to reduce anxieties, even as market trends remain hard to predict.

"People are feeling a little better right now," he said.

Private pension plans, including 401(k) plans, have become the foundation of many retirement portfolios.

Those plans now pay almost $380 billion in annual benefits nationwide. This is $63 billion more than the retirement and survivor benefits that are paid from Social Security.

Still, industry estimates are that only half of all private-sector workers have any kind of pension, and only 20 percent of small businesses have a retirement plan for their workers.

More and more businesses are scaling back, revamping or abandoning pensions for their employees. Today, almost half of all American workers have no pension plan at their job.

For workers at firms with fewer than 100 employees, industry estimates are that only one in five is covered by a company retirement plan. At companies with more than 100 employees, only three out of five workers have guaranteed pensions. By comparison, in 1980, five out of six workers at large companies had pensions.

Many companies some years ago started to shift from traditional "defined-benefit" pension plans —which provided retirees with a guaranteed monthly payment based on their years of service — to "defined-contribution" plans, such as the now-widespread 401(k)s.

Oye said many employers in Hawai'i and elsewhere began shifting from traditional pension programs to 401(k) plans because former programs were growing too costly. The shift, she added, meant not only that employees needed to put up matching funds, to assume the risk.

As a consequence, she said, individual employees have had to become more educated about the stock market and other investments. Often, they need to set up secondary accounts to ensure their retirement income will be sufficient.

The need for individual accounts becomes more acute for people with no retirement plan at all.

Mike Reilly, group pension resource manager for the Honolulu office of Guardian Life Insurance Co. of America, said many Island business owners have not had the capital or incorrectly assumed they couldn't afford to start retirement plans.

But the costs of qualified retirement plans are becoming more affordable, he said, as new rounds of U.S. legislation provide business owners more flexibility and usefulness.

Until three years ago, Reilly said, government initiatives were usually aimed at restricting plans. Lately, the tone has changed among Washington policy makers.

"With all this talk of Social Security being underfunded by 2030, they're opening all these new doors," he said.