In another sign of pure survival strategies, last week the New York Times reported that the Charles Schwab Corporation, struggling through the worst slump in its history, became the latest company to discontinue contributions to employee retirement plans. Following extensive redundancies, the decision is another morale blow to Schwab employees. Indeed, it is a very painful cost cutting move for the full-service financial institution that prided itself on providing independent financial advice to thousands of clients, many of whom incidentally invested their retirement holdings with Schwab.

Is This a Major Corporation Trend? Other companies who have already cut retirement benefits or are planning to, are Ford Motor, DaimlerChrylser, Goodyear, Great Northern Paper, Tech Data, El Paso Corp; the list grows on. This news does not bode well on the individual savings front, as the average American's retirement programme has already reached inadequate levels.

The most common retirement plan available today to US workers is the defined contribution plan, which was created a little over 20 years ago by American benefits consultant Ted Benna. 401k's (Defined Contribution Plans) revolutionised the pension industry by using a loophole in the United States tax code to allow both the employer and the employee to contribute to the tax deferment in retirement of a portion of the employee's current compensation. DCP's come with a catch. The largest burden falls to the employee to assume responsibility for his/her retirement savings. The old days of the all encompassing defined benefit retirement plan where the employer company fully funded a pension plan based upon the employee's last three years of highest earnings are over. The sheer cost and contractual future liability for payment to increasingly long-lived retirees is not sustainable.

401k retirement plans are structured on a carrot and stick basis; companies provide an incentive alone or elect to match what their employees contribute of their own money. Prospective job seekers rate future employers on the generosity of their pension contributions. And over the years as the rest of the civilised world has also shifted responsibility for worker pensions from government to the private sector, many global corporations and countries have adapted variations of the original 401k plan.

In the US alone, in excess of 45 million 401k participants are predicted to hold retirement assets of more than $2.1 trillion dollars. That enormous dollar power helped drive the 1990s bull market, making many wealthy - on paper. As these plans proliferated and became more popular, mutual fund entry barriers dropped and the participation rates among small investors soared.

Why, might you ask, should local residents be the least bit interested in these financial tidbits? Two very good reasons.

First - the American consumer no longer 'feels' wealthy. Unemployment is rampant; investors feel capital markets have betrayed them. Those who have lost out on devaluations in 401k plans, must now face employers who are refusing to help them save anything for the future. The Wall Street Journal reported March 19 that 41 percent of consumers surveyed say they plan to cut back on spending - not because of the war as much as unemployment worries and higher gas prices. Life seems bleak. What do you think this perception of reality will do to current vacation plans?

Second - when was the last time you looked at your Bermudian pension plan? Capital market performances aside, are you aware that it is mandatory for your employer to contribute to your retirement? Yes, mandatory, the word elective is never mentioned! Even after three and a half years of a bear market, your employer must deposit into your account week after week, month after month, without fail, a minimum of four percent (this year) of your gross pay. Restricted! Government's thinking is that at least, you will have something when you grow old. This is a gift of found money that many US consumers no longer have, but is it appreciated here in Bermuda?

Regardless of how his/her business is doing, stressful or easy, profitable or not, your local employer does his duty. You owe it to this employer today to say, "Thank you, I appreciate what you are doing for me."

Stop to think about it, if Charles Schwab Corporation, Ford Motor, and DaimlerChrysler have declined to contribute to employee pension plans for the next couple of years, what does that say about their economic outlook? Has it occurred to you that your employer may be taking that four percent (five percent in fiscal year 2004) out of his/her own pocket?

Thrift - or better known as savings is a complex subject. Most people believe it is not that difficult to put money away for tomorrow. In 1985, Franco Modigliani won the Nobel Prize for his study of human behaviour and savings. For those of you interested in economics see http://www.nobel.se/economics/laureates/1985/modigliani-autobio.html.

"The study of individual thrift and aggregate savings and wealth has long been central to economics because national saving is the source of the supply of capital, a major factor of production controlling the productivity of labour and growth over time." Interpretation, governments and businesses must utilise significant sources of savings to keep economies going. Now Professor Emeritus at Massachusetts Institute of Technology (and 86 years old), Mr. Modigliani recently appeared on 'Wall Street with Louis Rukeyser still stressing the benefits of savings.

Save We Must

Predictably, most people find it very hard to save in a disciplined fashion. There is a cultural mindset that refuses to translate that the gratification of today can morph quite suddenly into the deprivation of tomorrow.

But save we must. It is the only way to assure ourselves of some contingency plan and a lessening of economic anxiety during lean periods and uncertainty. The good times won't last forever; it is often said here that they have already lasted far longer than anyone could predict. Those who have saved will survive to tell the tale.

@EDITRULE:

Martha Harris Myron CPA CFP is a Bermudian, a Certified Financial Planner (US licence) practitioner and Investment Advisor , VP, Personal Financial Services, Bank of Bermuda. Confidential Email can be directed to marthamyronnorthrock.bm

The article expresses the opinion of the author and not necessarily those of the Bank of Bermuda.