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Monday, March 14, 2016

Wall Street 'financial engineering' adds risk to HP retirees' pensions

headline 'H-P executive predicts 700 new jobs' Gazette-Times Aug. 8, 1974, p. 2

PHOTO: A newspaper headline from 1974 reports Hewlett-Packard's plans to build a calculator plant and research facility in Corvallis as described in the newspaper article by John Atkins, "H-P executive predicts 700 new jobs," Gazette-Times Aug. 8, 1974, p. 2. (See previous posts HP breakup making Bill and Dave spin in their graves (8/11/15) , Don't Cali-fornicate Oregon and HP annexation history (6/14/12) and HP and Corvallis newspaper history (3/11/09) about the move of the Hewlett-Packard calculator division to Corvallis in 1975)

Today, the business news is full of stories about the "financial engineering" of Wall Street that is being done supposedly to "enhance shareholder value," or in laymen's terms, to increase the profits of investors. Although it can be argued whether or not individual investors will also profit from Wall Street's financial engineering, it is clear that individual workers and retirees are often the source of these extra profits by increasing the risk levels or by the outright underfunding of pension plans.

For example, I recently received a letter, written in the dense legal language used by lawyers who are required to comply with government regulations and laws concerning pensions, which disclosed the financial plans for grandfathered company pension plans after the latest split-up of Hewlett-Packard. It prompted me the following letter to the editor of my local paper that is located in a town that for decades has been dominated economically by an HP division and Oregon State University:

I didn't believe the newspaper stories until I received a legal letter confirming that the financial obligations of grandfathered Hewlett-Packard retirement plans were dumped entirely onto the new HP Inc. personal computer and printer business instead of it being shared equally with the newly split off Hewlett-Packard Enterprise Co. software and services business.

The good news is that these grandfathered plans appear to be fully funded.

The bad news is that a Wall Street reporter recently claimed that HP Inc. is financially "in a freefall."

Clearly, Wall Street's so-called "financial engineering," of splitting up HP for profit, is being done at the expense of main street retirees by concentrating pension risk in a less diversified HP Inc.

Most companies, including HP, quit offering traditional retirement plans to newer employees after President Reagan led Congress in changing pension laws in a way that has shifted nearly all of the responsibility for retirement savings from employers to employees' 401(k) plans and individual retirement accounts.

If Donald Trump is elected President, I expect Congress will, as President Reagan envisioned, eliminate Social Security because conservatives have opposed it since FDR signed it into law in 1935.

(Quoted from Thomas Kraemer, "Letter: Does HP move foreshadow future?" posted Mar. 14, 2016)

The reduction in diversification of Hewlett-Packard is even when worse when you add in the previous split off of the HP instrument divisions, which formed the start of HP in 1939, and then a further split of instrument divisions into two new companies, Agilent Technologies and KeySight Technologies. When HP was being run by its founders, Bill Hewlett and Dave Packard, they purposely wanted diversification because it was their personal fortune, whereas today the fad on Wall Street is not to diversify because it makes it harder for Wall Street to see how each part of the company is doing profit wise. (See previous post HP breakup making Bill and Dave spin in their graves (8/11/15))

In fact, the risks associated with company pensions is why pension reform laws were passed decades ago and the "Pension Benefits Insurance Corp." was formed to cover pensions when companies go out of business or individuals' company pension plans crash for whatever reason. These risks are often pointed to by conservatives as the reason why you want to shift pension responsibility to employees via IRA plans and 401(k) plans. Of course, businesses love doing this because it costs them less and many skilled employees have recently been able to be better off financially by managing their own accounts, however, shifting pension responsibility leaves a large segment of workers uncovered by any pension savings, and so these employees will eventually become a burden to society, which became evident during the FDR era that led to the invention of the Social Security retirement system in America. (See the official Social Security website: "Social Security History, 1935 Congressional Debates on Social Security," accessed Mar. 5, 2016 that says, "On August 14, 1935 President Roosevelt signed the bill into law at a ceremony in the White House Cabinet Room." Note that the definitions of Party line votes was different back then, but it is clear from history that conservatives and liberals have always been at odds on Social Security, even though both Republicans and Democrats have supported it at various times.

UPDATE Mar. 30, 2016 - see articles by Carol Matlack, "The Case of The Missing Pension: Tracking down a plan from a former employer can be difficult," Businessweek, Mar. 28-Apr. 3, 2016, p. 50-52 (my former employer divided up into four companies, but the pension manager Fidelity is sending me monthly retirement checks) and Lewis Braham, "Tax Planning: Watch Out, Boomers, Here Comes 70: Mandatory payouts from savings plans may trigger new taxes," Businessweek, Mar. 28-Apr. 3, 2016, p. 48-49 that says, "Why is 70 the magic number? U.S. tax law stipulates that you must take your first required minimum distribution (RMD) from your individual retirement account and 401(k) accounts in the year you turn 70-1/2 . . . Those who don't comply face a 50 percent penalty on that amount. . . The scale of distributions for boomers, who were born between 1946 and 1964, will put financial advisers in uncharted territory. . . Fidelity Investments . . average IRA balance for its 70-year-old clients is about $200,000 . . The RMD in 2016 starts at 3.6 percent of the yearend balance on your tax-deferred retirement accounts and grows each year: By age 80 you're taking out 5.3 percent, and by age 90, 7.9 percent."

The first Businessweek article echoes my letter Thomas Kraemer, "Letter: Does HP move foreshadow future?" posted Mar. 14, 2016 concerning the shift to 401(k) and IRA from employer pension plans.

The second Businessweek article doesn't mention the option of self-annuitizing your IRA at age 59-1/2, without penalty, which results in a smaller monthly payment and a tax bill spread over your expected life span. I took this option, despite it not being advised by all financial planners, because I didn't need a big withdrawal each month and I wanted to avoid a bigger tax bill later on when the RMD became greater and greater each year. The low interest rate environment made it an even smaller monthly payment amortized over my life expectancy assumed by the IRS.

I looked into the possibility of buying a life insurance annuity, but it didn't make sense because the fees were too high and it eliminated any flexibility of changing my mind. By doing my own annuity payments from my IRA, there is a chance that I could be lucky and have the IRA grow faster than what the monthly payments, but I also risk it being wiped out prematurely, unlike with a life insurance annuity, but I would still have to worry about the solvency of the insurance company.

Note that a graph in the second Businessweek article shows the percentage of population older than 70 rising from less than 9 percent of the U.S. population in 2015 to nearly 18 percent in 2035 before leveling out for a while. This large number of nearly 1 out of 5 people being over the age of 70 will cause an interesting change in the economy especially given the psychology of retirees not wanting to spend too much money.

The second article, Lewis Braham, "Tax Planning: Watch Out, Boomers, Here Comes 70: Mandatory payouts from savings plans may trigger new taxes," Businessweek, Mar. 28-Apr. 3, 2016, p. 48-49, also quotes a Fidelity Investments manager who claims, "the average IRA balance for its 70-year-old clients is about $200,000 . . ," and notes, "Managing your RMDs isn't the only financial challenge awaiting those who turn 70. That's also the age when an individual can begin collecting the maximum benefit for Social Security. Those who opt to receive benefits at the earliest age of 62 receive about 25 percent less per month than a 66-year-old retiree and 43 percent less than a 70-year-old one. Boomers who have the financial wherewithal should definitely hold off until 70." Although conventional financial planning advice is to wait to take Social Security to get the bigger amount, I am glad that my mother decided to take it at age 63 because she died at the age of 65 and would not receive anything back form either her or my dad's Social Security payments.

END OF UPDATE Mar. 30, 2016