Saturday, March 31, 2007

Another One Bites the Dust?


When Fidelity announced this last week that it was dropping its pension plan, it drew my attention.

Not so much because it was taking that step. By now, there have been enough pension fund freezes—or enough reports about how many pension fund freezes there will be—that the occasional announcement barely fazes me anymore. That Fidelity chose to do so while “riching up” their 401(k) plan (see “Fidelity Investments to End DB Plan”) was also pretty much standard fare for such moves.

But there was a significant difference in this particular announcement—a focus on concerns about paying for health care in retirement. In a Boston Globe report, a Fidelity spokesperson cited data that 71% of Fidelity workers didn’t know how they would pay for health-care expenses in retirement (kind of makes one wonder about the other 29%); and as part of this shift in strategy, Fidelity will be putting $3,000 into health-care reimbursement accounts for each worker—monies that won’t be taxable when withdrawn (ostensibly if used to pay health-care-related expenses).

There’s little question that health care looms large as a concern for most Americans. People routinely make job choices based on the availability and quality of an employer’s health-care program, and there is at least anecdotal evidence that, as workers have been asked to shoulder a larger share of the costs of those programs, they have paid for at least some of that with cutbacks in retirement savings. It’s now seen (or at least reported) as a “good” year when health-care costs increase at only twice the rate of inflation.

A Growing Concern

Moreover, there is a growing sense that the seemingly relentless upward trend in the costs of health care could well jeopardize an already financially precarious retirement lifestyle. A recent study by none other than Fidelity itself projects that an average 65-year-old couple will need $215,000 to cover retirement health-care costs (see “Fidelity Says Retirees Need $215,000 to Cover Health-Care Costs”). Workers have reason to worry; Medicare, the primary medical safety net for many retired Americans, is in more tenuous financial shape than Social Security—and corporate America has been shedding its retiree medical programs for longer and with more “vigor” than their more recent focus on setting aside those traditional pension plans.

It remains to be seen how Fidelity workers will respond to the change. With an average employee age of 35, it’s doubtful that they were emotionally much invested in the pension plan, IMHO. Moreover, a richer 401(k) match and the ability to roll their accumulated pension balances into a more “tangible” (as in one being capable of being touched) profit-sharing account will likely be appealing.

All in all, Fidelity has probably managed to transform a vague, uncertain, future benefit into something that can be appreciated in the here and now—and by putting an emphasis on retiree health-care costs front and center with their own workers, they also may have helped bring visibility to a critical retirement savings need—while there’s still time to do something about it.

- Nevin Adams

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