NEST EGGS : Stock Crash Hits Some Retirement Plans Hard

After 33 years as a computer programmer for Lockheed Corp. in Burbank, Cuno Ranschau was looking forward to retiring late in 1988. But in the course of an afternoon two weeks ago, Ranschau, 57, abruptly decided to check out early.

Ranschau heard through the office grapevine that if he retired before the end of October, his account in the company savings plan would escape the devastating impact of the stock market’s mid-month collapse. With his retirement funds 80% invested in stocks, Ranschau stood to lose about $50,000--more than his annual salary.

So, like 602 other Lockheed employees, he took advantage of an accounting lag and retired Oct. 30. “When the financial facts were there on the table--that I could work for a whole year for nothing, because I would have lost that much money or more--I said, ‘Wow! Forget it,’ ” Ranschau explained.

The spur-of-the-moment judgments at Lockheed were only the most dramatic of a wave of decisions thrust upon Americans nearing retirement by Wall Street’s turmoil.

Some, their company retirement accounts and private nest eggs decimated when the Dow Jones industrial average fell 508 points in a day, found that they will have to work longer than they had planned. Others struggled to translate dizzying memos about company pension programs to determine if they had been hurt.

And the investment choices that trouble everyone with a stake in the U.S. economy are especially pressing for those who soon will have to live on their investment income. Is it, they wonder, a time to hope for a rebound and stay in the market? Or should they cut their losses and shift into money market funds, certificates of deposit or other relatively secure investments?

Experts say the situation is not cataclysmic. The market, after all, did no worse than retreat to slightly above its level of a year ago. Traditional pension plans seem, in the main, to have weathered the crash--despite some eye-popping losses--so the 42 million workers depending on them for retirement benefits need not lose any sleep.

Some Are Hurting

But many of the 150,000 workers who retire each month don’t have the security of a guaranteed pension benefit from their employer. There are 47 million workers not covered by any kind of employer pension program, according to the Employee Benefits Research Institute in Washington. Another 13 million workers must rely exclusively on so-called “defined-contribution” retirement plans, in which the post-retirement benefit depends on the investment performance of funds contributed by companies and employees.

Like participants in IRA and Keogh plans, these employees--through profit-sharing plans, stock options, employee stock ownership plans and a variety of tax-deferred savings programs--have been free to place their retirement savings in volatile investments that may have been clobbered by the market crash.

Those that did--their numbers are unknown--are hurting. “What we’re seeing at this moment is wide-eyed amazement,” said Roy Oliver, partner in charge of human resource consulting for Peat Marwick Main & Co. in Los Angeles. “Those that are in defined-contribution plans and are very close to retirement have taken a very big hit.”

Many people, however, have the good sense to grow more conservative about their finances as they close in on retirement, financial planners say. Given a choice, they opt for guaranteed and fixed-rate investments in their company savings plans and IRAs, reducing their exposure to market fluctuations. Surveys, in fact, indicate that about 70% of participants in defined-contribution plans opt for investments that earn a guaranteed interest rate.

And even the minority of imminent retirees who were heavily invested in the market during the October collapse generally saw only their 1987 paper profits erased.

Reevaluating Strategies

“Anyone who was planning, at the beginning of 1987, to retire at the end of 1987 has no basic reason to change their plans,” said Dallas Salisbury, president of the Employee Benefits Research Institute.

Nonetheless, the stock market’s tumble has prompted employers to rethink their commitment to an array of market-sensitive retirement planning vehicles, whose popularity has expanded dramatically over the last two decades, and especially during the bull market’s five-year run.

Defined-contribution plans may seem less attractive now that some workers are chalking up losses. And though the plans were sold to employers as money-saving innovations, the pounding some took in the market crash now is forcing at least a few companies to pump in extra money, rather than risk alienating employees by letting them drift into retirement financially unprepared.

“It’s one thing to pass the investment risk onto the employee when everything is going up,” said Michael Footer, a principal with the Richmond, Va., office of William M. Mercer-Meidinger-Hansen, a benefits consulting firm. “It’s another thing to pass the risk onto the employee in markets like the ones we’ve been having.”

Several groups of workers were especially vulnerable to the market turmoil, according to financial planners, benefits consultants and corporate benefit managers.

Employees whose retirement funds--either through an employee stock ownership plan or a tax-deferred savings plan--were heavily invested in the stock of a company whose share price plummeted took a direct hit. So did workers whose IRAs, Keoghs or defined-contribution plan accounts were invested in aggressive stock funds. Top level executives who had counted for retirement income on exercising stock options in a stock whose price fell dramatically also suffered in the crash.

Switching Investments

In other words, both risk-takers and company loyalists may have been hung out to dry by their desire to participate in the bull market’s charge, retirement planners say.

“Some of the people that are retiring I’ve had to battle with not to use a rate of return of 20% to determine what their assets were going to be at retirement,” said Duglas Wright, a financial planner in Costa Mesa.

“They felt comfortable and competent that they could achieve that rate of return. But they’re looking at the situation right now as an impossible task. They feel demoralized,” Wright said. One of Wright’s clients, panicking in the wake of the crash, canceled the renovation of the house on Balboa Island where he planned to spend his retirement years.

Early this year, Robert Knowlton, an attorney in the San Diego suburb of Lemon Grove, had shifted his retirement program from money market funds and government securities into a more aggressive mix of stocks and real estate investments, hoping to earn enough to allow him to retire by the end of 1987.

Even though his law firm’s investment managers fared better than the broader market during last month’s debacle, the 10% drop in Knowlton’s account was enough to force him to delay his retirement--until no later than July 1, he hopes.

“The performance of those stocks we got into at the first of the year was so dramatic we thought we were in a position to get out early,” said Knowlton, 64. “Now we have to wait and see if it climbs back.”

The market retreat affected everyone differently. For instance, benefits consultants say employees nearing retirement whose nest eggs were invested mainly in their employer’s stock--an option for nearly half the workers whose retirement programs include tax-deferred savings plans--may have suffered serious financial shocks if the stock took a beating on Black Monday.

But if they worked for a utility--and purchased the stock more for its dividends than its growth potential--their retirement outlook probably remained sound.

Dividends Safe

Jerry Beatty, a Pacific Bell spokesman in San Francisco, had the bulk of his $100,000 company savings account invested in Pacific Telesis stock, which suffered a 19% drop on Oct. 19.

Beatty, a 20-year employee who intends to retire in December, spent a lot of time that day following the market’s tumble on a news ticker down the hall from his office. But Beatty, 62, said his retirement plans survived the fall.

“So far, nothing has happened to dividends, and my investing for quite a while has been directed to dividends,” he said. “My net worth took a beating, but I don’t think my retirement income did.”

Companies are having to wrestle with a variety of financial and employee-relations issues in the aftermath of the crash.

Benefits analysts are unsure how many firms’ defined-contribution plans, like Lockheed’s, allow employees to make withdrawals from their retirement accounts based on the account’s value the previous month. It was that accounting loophole that allowed Ranschau and the other new Lockheed retirees to cash out their accounts in late October at Sept. 30’s pre-crash values.

A few companies already have decided to pump money back into such plans, so the cost of the recent retirees’ windfall won’t have to be borne by co-workers remaining in the plan, according to Donald W. Hasbargen, a partner in the Minneapolis office of Hewitt Associates, a benefits consulting firm. Other employers plan to make up the losses in employee retirement accounts that were battered by the market’s fall, said Mercer-Meidinger’s Footer.

But some firms are taking a sterner line--closing loopholes similar to the one in Lockheed’s plan, recalculating employees’ account balances so windfalls are erased, or insisting that workers pay the price of their own poor investment decisions.

Broader Choice

“The employee knew what he was getting into,” these companies figure, according to Footer. “He took the loss and that’s the way it’s going to be.”

The harsh realities of recent weeks have renewed the debate among retirement planners over the role that defined-contribution plans should play in corporate retirement programs.

Mercer-Meidinger has issued a report advising companies to undertake sweeping reassessments of their benefit plans. “In particular,” says the report, “employers who use defined-contribution plans as the only element in their retirement programs may want to reconsider this decision, since poor investment performance can jeopardize employees’ lifetime security.”

The Labor Department recently proposed regulations that would require employers to afford workers a broader choice of investment options within defined-contribution plans. The Reagan Administration is standing by the proposal in the wake of the market’s unrest, according to department spokesman Charles W. Lee Jr.

Without any further prodding, however, workers and retirement fund managers already seem to be taking the painful lessons of the market’s crash to heart.

Not Business as Usual

In a normal month at IBM, as many employees shift their retirement investment portfolios from stock funds to a fixed-income fund as make the more aggressive move from guaranteed income to stocks. But in October’s market upheaval, a company spokesman said, three out of four employees who transfered their nest eggs moved out of stocks and into the conservative fixed-income option.

Meanwhile, financial advisers say corporate pension plan committees have been shifting fund assets from stocks into bonds. And trustees of defined-contribution plans may return to a more conservative focus in the investment options they offer employees, said Timothy E. Hankins, a consultant in the Sherman Oaks office of the Wyatt Co., a benefits and compensation consulting firm.

“What we are advising our clients is, ‘Look--it’s not business as usual,’ ” Hankins said.