>> For the baby boom generation, there's trouble ahead.
>> Workers are going to retire into despair and run out of money.
>> The reality of retirement is starting to sink in.
>> I thought when he retired it was going to be a lot different.
>> It's scary as hell.
>> The hardest thing is not knowing that I'll be able to retire.
>> Good morning, how are you?
>> Tonight, on Frontline, correspondent Hedrick Smith explores the changing world of retirement, discovering how corporations are dumping old-fashioned pensions... >> Bankruptcy is a way to take legal promises and burn them.
>> ...examining how the new 401(k) plans are working... >> The idea that we should all be financial experts is a crazy idea.
>> And asking: Can You Afford to Retire?
>> We're now shifting from lifetime pensions to lifetime work.
>> SMITH: This is a story we could tell anywhere in America, but we'll begin here in Lincoln, Nebraska.
>> This top sheet says, "Disclaimer and Objectives."
>> SMITH: It's Monday morning.
People in their 50s are getting the word on how to prepare for retirement.
>> The number-one goal that's listed there says: "To provide you with general information on retirement planning and your pension plan benefits."
>> SMITH: These people have 401(k)-type plans, and they're in for a wake-up call.
>> I have some bad news for everyone in the room.
Americans are not saving enough money for retirement.
There's a lot of people that are my age that are really going to have a very nasty surprise in about the next ten years.
When I saw how much money I was going to need to maintain my standard of living after I retired, that was quite an epiphany for me that day.
>> SMITH: For many Americans, it used to be that your employer took care of your retirement.
>> What we're trying to say is a lot of the decisions that you're going to have to make are decisions that only you can make.
>> SMITH: But now the tables have turned.
Corporations have stepped back and put the responsibility and much of the cost on individuals.
>> Our pension system has changed dramatically.
People aren't going to have pensions like they used to, where you get a benefit for the rest of your life.
People are going to retire, basically, with 401(k) plans, and that's all.
>> SMITH: The boomer generation is finding itself long on life expectancy and short on income.
>> How many of you have seen somebody retirement age working at McDonald's or Burger King?
Now, do you think that their retirement goals are to supersize fries?
They're there because they have to, aren't they?
>> I think this is a crisis in the making.
I think ten or 15 years from now, people who approach their early 60s are simply not going to have enough money to retire.
>> SMITH: So how did the boomer generation get into this fix?
It's not something that happened overnight.
The story unfolded over a couple of decades.
A generation ago, our parents could expect that a lifetime of work at a major company would be rewarded with a lifetime pension.
But all that is changing.
>> Well, you got the yogurt and the grapefruit, I guess.
>> Right, and the tacos and the eggs.
That should be enough, because you're only going to be gone three days.
>> Okay, that sounds good.
>> SMITH: North of Seattle, Pat O'Neill is headed out for another lonely haul on the highway.
>> All right.
>> SMITH: His life isn't all that different from most truckers, except for one thing: Pat O'Neill retired three years ago.
>> Well, I'd just turned 55 March 5, 2003.
I thought, "Well, I've got 35 years.
Yeah, I'll...
I'll go."
>> SMITH: O'Neill is typical of his generation.
He spent his entire career working as an aircraft mechanic for one company, United Airlines.
>> I always felt I was doing quite well working for United.
I had a work ethic and I was very loyal to the company.
When they called, I went to work.
>> SMITH: Back in 2003, when United was trying to cut costs, O'Neill says the company encouraged him to retire.
>> They said, "If you old guys want to get out "and save your medical insurance for your retirement, it might be a good time to think about leaving."
>> SMITH: O'Neill took the advice and retired, counting on a guaranteed $3,000 monthly pension check for the rest of his life.
>> I knew I had a good retirement.
Check would come every month and we'd be able to just kick back, enjoy life, no more working midnights, live like a "normal human being," as we call it, and spend quality time with each other.
>> SMITH: But after a while, Pat O'Neill got a jolt: his pension was slashed by a third.
>> That was money that I worked for, that I earned, that I felt that I did my job.
And my thought is that retirement is sacred.
They do not touch that.
This is what you sign for.
It's flat wrong for a company to have to go back on their word as far as your pension.
I'm going to be forced to have to stay working because of what United Airlines and the bankruptcy laws, the way it was indicated, said they could do it and got away with it.
>> SMITH: Pat O'Neill, like more than a million other workers and retirees, is a casualty of corporate restructuring and Chapter 11 bankruptcy.
United Airlines filed for bankruptcy in December 2002.
In the '90s, United had been flying high.
But then low-cost carriers started eating away market share, and after 9/11, United lost traffic and money big time.
Deep in debt, United sought a government loan guarantee.
After being rejected, United filed for bankruptcy.
>> Everybody knows, I think, Chapter 11 serves a useful purpose.
That's why the statute exists.
Comp... it's there for companies to take advantage of when the occasion presents itself.
>> SMITH: Glenn Tilton had been hired as United's new C.E.O.
just three months earlier.
He came with experience in bankruptcy at Texaco.
>> The die was cast when Mr. Tilton was hired.
>> SMITH: Why?
>> Because Mr. Tilton was brought in to do what the board and previous management didn't have the guts to do.
>> SMITH: Which was?
>> Take it through bankruptcy and clean it up and confront the unions.
>> Bankruptcy is terrible for the employee.
It's an absolutely horrific experience for the people who worked hard to build a company, and through no fault of their own and as a result of some poor management decisions, it means being forced to negotiate changes to your working conditions, to your terms of employment with a gun to your head.
>> SMITH: Employees like flight attendant Robin Gilinger felt the pressure of management's demands for concessions.
>> The effect of the bankruptcy was stressful.
It was not knowing what you were going to lose.
In a bankruptcy, as a working group with a union, you know you're going to give back something.
>> ...checklist departure... >> ...is complete.
>> SMITH: And give back they did, making concessions across the board in hopes of saving the main portion of their lifetime pensions for the long run.
>> We take cuts in pay, we take cuts in the area of work rules, we take cuts in the area of health benefits, and we take cuts in the area of pension benefits.
>> SMITH: In two big rounds of cutbacks, United's four major unions agreed to $3.3 billion in cuts, sacrificing to save the company.
But that wasn't enough.
United and its banks wanted more.
United bankruptcy attorney Jamie Sprayregen: >> At that point in time, it really became clear to everybody that there was going to be no way to exit this bankruptcy case without taking on what I had called the silent elephant in the room-- that is, addressing the pension issue.
>> SMITH: United's pensions had become an elephant-sized issue because, for several years, United, like many companies, put little or no cash into its pension trust funds.
Instead, United counted on credit for past contributions and overly optimistic assumptions about stock market gains to meet its pension obligations.
But after the market plunged, United's pension funds were almost $10 billion in the red.
Through bankruptcy, United shifted the responsibility for paying its workers' pensions to a little known federal agency, the Pension Benefit Guaranty Corporation, the P.B.G.C., which insures failed pension plans.
>> When companies get into difficulty, then what they will look to do is say, "Where are all my costs?"
And, "Gee, I have a lot of cost here "in these so-called 'legacy' promises "that I've made to my workers and retirees.
"I can no longer afford those "now that I'm in financial difficulty.
Perhaps I can shift those costs to other parties."
We act as the backstop.
>> SMITH: The P.B.G.C., financed by premiums from corporations, was set up in 1974 to encourage companies to maintain their pension plans and to ensure that promises to employees were kept.
>> We have a little over 800 full-time federal employees.
We also have... >> SMITH: But those promises turned out to be flimsy, because companies were given a lot of flexibility to interpret the pension funding rules under the employment retirement law, known as ERISA.
>> The funding rules under ERISA are fundamentally flawed.
They're broken.
They are riddled with loopholes.
>> SMITH: You mean Congress wrote a law that said, "Fund pensions," and then, in effect, gave them a free pass?
>> I'm not sure you would characterize it as a "free pass" but nonetheless, it does not require, the way it operates, companies to fully fund their pension promises.
>> SMITH: By exploiting those loopholes, corporate America has created a time bomb.
More than 18,000 companies have under-funded their pensions.
In five years, several large companies have dumped their pension debts onto the P.B.G.C.
Its deficit is now $23 billion, and threatens to balloon far larger.
>> The level of under-funding in the system as a whole, which we estimate at $450 billion today, is... is substantially more than it was just four or five years ago.
It was less than $100 billion.
>> SMITH: Let me get this straight.
You're saying that the current corporate pension system in the private sector today is under-funded by $450 billion?
>> That's if everybody were to try to terminate their pension plan today.
>> SMITH: In the end, some warn, taxpayers may have to cover the bill for failed corporate pensions.
>> I would say that $100 billion would be cheap to repair the damage to our... our retirement system.
I think it's going to cost more than that.
>> SMITH: And the taxpayers are going to foot the bill?
>> Believe me, the government doesn't pay anything; the taxpayers pay everything.
>> SMITH: The risks are compounded by the major bankruptcy reform enacted in 1978.
That law gives troubled companies like United a way out of their commitments to employees.
>> In 1978, we adopted a new bankruptcy code in the United States, and a principal part of this was designed to adjust to the new corporation, to find ways to let a corporation that had gotten into financial trouble reorganize itself.
>> The essence of bankruptcy is that whatever promises the company has made, they can't live up to all of them and they need to find a way to deal with the fact that they've promised more than they have.
>> SMITH: Jamie Sprayregen, the lead bankruptcy lawyer for United Airlines, is the most visible edge of an entire new industry that has developed in law firms and Wall Street banks to move companies through bankruptcy.
>> These days, every large law firm in the country has some sort of bankruptcy practice.
We have around 100 lawyers who do nothing but this.
The practice is really moved to be a mainstream part of most big law firms these days.
>> SMITH: The business has mushroomed as bankruptcy lost its stigma and gained acceptance as a corporate strategy.
>> I would say that Chapter 11 has become somewhat of a more accepted strategic tool than just companies filing who are about to go out of business or something like that.
And as a result, there is more use of Chapter 11 now than probably 20 years ago.
>> SMITH: Over time, sophisticated lawyers and financial insiders figured out how to game the bankruptcy law.
Their strategy enables companies like United to walk away from costly pension obligations.
>> It wasn't that way some years back, but now it's become a virtual control situation between the management of a company in Chapter 11 and the bankers.
They control the playing field, the size, the shape, and generally the final score.
>> SMITH: Hugh Ray, a bankruptcy lawyer for more than three decades, gave me an inside look at United's playbook in this fat stack of documents known as the judge's first-day orders.
First-day orders are not actually written by the bankruptcy judge, but by United and its lawyers hand in glove with its bankers.
>> If you look in the bankruptcy code, you won't see anything about first-day orders.
It's something that's developed.
And the first-day order practice is probably the biggest single thing that turned around the practice of bankruptcy to where it is now.
>> SMITH: First-day orders are not written to take care of employees, but to protect the power of management and the loans of bankers.
>> It says right here in the United first-day order that the lenders are given superpriority claims-- superpriority.
Not just priority, but superpriority.
>> It's a superpriority claim... >> SMITH: Bill Repko, who was with J.P. Morgan, led United's bank syndicate.
>> The framers of the bankruptcy code recognized that people who were going to lend money to bankrupt companies were embarking upon a very risky enterprise.
And so they created a series of safeguards, one of which moved the bankruptcy loan to the head of the queue to get repaid, and that's called the superpriority.
>> SMITH: It sounds as though, through the first-day orders, the whole deal, the whole outcome is pre-cooked.
>> Absolutely.
The die is cast.
>> The question up front about who will have what priorities if this business collapses is where the whole game is won or lost.
Ironically, it is the bankruptcy laws that are responsible for much of what has happened here, because bankruptcy laws currently say, "Banks, you can take it all," because bankruptcy laws don't leave something on the table for the employees and the retirees.
>> SMITH: So if bankruptcy doomed United's pensions from day one, why did United take two-and-a-half years to kill its pensions?
I asked Jamie Sprayregen.
>> It may have been intellectually obvious, but coming up with a process by which to handle adjusting expectations so people would buy into the need to address the pension issue without it becoming a situation where we would lose what we call "the hearts and minds of the employees" was a real challenge and an art.
>> Ultimately, what we concluded was that management had a very deliberate course of action set out from the beginning of the bankruptcy, which was to roll out demands for concessions over a period of time in an escalating way in order to bring the employees along without creating a spark that would have led to... to real labor unrest.
>> SMITH: A strike.
>> A strike.
>> What it really comes down to is how much can we take away from the employees before they finally say, "Fine, you take it, but I'm not working here any more."
And no one else will come to work for them, either.
That's what corporate reorganization in America has become: "How much less can I give you and still keep you here?"
>> SMITH: For United, the strategy worked.
Last February, after 38 months, it re-emerged from bankruptcy, calling itself a vastly more competitive airline.
>> Five, four, three, two, one!
(applause) >> SMITH: Its top management triumphantly launched the company's new stock on NASDAQ.
>> United is extremely important because it was considered a successful reorganization in that the airline came out flying, the airline survived, a number of the employees' jobs were retained, the routes were retained, and it serves as a good example of how you can reorganize in Chapter 11.
In terms of who got what, well, that's another matter.
>> SMITH: The banks, with their superpriority, got back every penny, plus interest, plus tens of millions of dollars in fees.
Is that payback in cash?
>> Yes.
>> SMITH: First and foremost?
>> Yes.
>> SMITH: Now, you got a bunch of fees.
Don't you get fees as well as interest rates?
>> Yes.
>> SMITH: Collectively, how much do the banks make on these fees?
>> We've never disclosed any of that stuff.
>> SMITH: The restructuring industry professionals were richly rewarded.
Jamie Sprayregen's law firm was paid $100 million.
People have said to us that the professional costs run something like $400 million.
>> Probably in the neighborhood of that, yes.
>> SMITH: That's a tremendous amount of money.
Workers giving up, you know, $3 billion worth of pensions and it's costing $400 million to get the job done.
>> I wouldn't call it cheap, but to accomplish what has been accomplished, that's in the range of what happens in restructurings even in healthy companies in corporate America.
>> SMITH: United's senior management got big bonuses to stay on during bankruptcy.
Like everyone else they took a hit on their pensions, but they more than made up for any losses by receiving a grant of $400 million in new stock.
>> How are you?
>> SMITH: But not everyone's pension was cut.
>> All United employee pensions have not taken a hit.
One notable exception is Glenn Tilton, who negotiated as part of his employment contract that a secular pension trust would be established for him for his retirement security.
>> We didn't mean to embarrass you.
>> SMITH: C.E.O.
Glenn Tilton got special protection for his personal retirement benefit, a benefit from his former employer that was bought out by United.
>> Our current C.E.O.
has decided to keep his $4.5 million pension.
It was unfair that he was keeping his in his contract and we were having to give ours up.
Glenn Tilton's retirement guarantee?
>> (laughing) I'm not going there.
I don't want to go on the record with that one.
>> SMITH: Is that a good idea, when he is asking other people's pensions to be put on the chopping block?
>> You know, Glenn... Glenn did a great job.
I think Glenn's compensation was appropriate under the circumstances.
>> SMITH: Glenn Tilton declined Frontline's repeated requests to talk about United's bankruptcy.
But the company says it is rehiring again, training 2,400 new flight attendants to replace some of the more than 5,000 who left during bankruptcy.
>> So we want the bread and the wine closest to the person who is on the forward side of the cart.
>> SMITH: United says it saved 55,000 jobs out of 83,000 pre-bankruptcy.
Its financial advisers boast that United saved $7 billion a year in costs through bankruptcy.
$5 billion in cuts came at the expense of employees and retirees.
Unions report pension losses for more than 50,000 people because the government's payout formula from P.B.G.C.
is lower than United's contracts.
>> We're looking at the abandoning of corporate responsibilities.
We're looking at changing the expectation of the middle class with regard to health care and retiree benefits.
And it's just not United Airlines.
It's happening all across the private sector in America today.
>> The restructuring business or the Chapter 11 business, it's just part and parcel of the American economy.
I call it the efficient workings of American capitalism.
>> SMITH: That efficiency took a heavy personal toll on rank-and-file employees, people like 42-year-old flight attendant Robin Gilinger.
Gilinger says she lost pay, some benefits and 30% of her pension.
>> Because of the bankruptcy, I have gone through great changes in the... in the time I'm away from my family and the time that I have to put to make up for the difference in the loss of pay and benefits.
In the late '90s, I was bringing... my yearly income was around $40,000.
Now, I am barely making the low... in the low $30,000s, and I'm...
I'm gone more.
I'm gone a lot more.
>> SMITH : And you're making much less?
>> Making that much less.
And then having to put away for retirement now because we don't have the pension.
That's an even greater strain on the income that comes in because I have to pay for medical and dental now.
>> SMITH: You got cuts in pay, you got extra expenses for medical and dental, you got insecurity on your pension, and you're going to have to work more years.
>> More years, a lot more years.
I'm going to have to... all of that combined, yes.
>> SMITH: I mean, how do you feel about that?
I mean, that's a... >> It's... it... at times, you have to hold back the tears.
>> SMITH: What's the hardest thing?
>> Not knowing... the hardest thing is not knowing that I'll be able to retire at United.
That's the hardest thing.
>> SMITH: You mean not knowing if the company will be here?
>> That they will be here.
Or not knowing if I'll be able to make the right decisions and be able to invest the ways that this new contribute... contribution plan is giving us... is not knowing.
>> SMITH: So, the uncertainty is really what's got you.
>> The uncertainty of not knowing where this is going to take us, this journey.
>> SMITH: What's happened to Robin Gilinger is that she's been thrown into the brave new world of do-it-yourself 401(k) retirement along with 40 million other Americans.
To understand what the future holds for them, I headed for the Sun Belt: Dallas, Texas, hub for new economy companies.
Outside Dallas, I visited a computer chip plant run by National Semiconductor, an industry leader in employee benefits.
I met Brian Conner, the company's benefits manager.
>> This is one of our largest plants.
We also have one in South Portland, Maine.
>> SMITH: Mmm-hmm.
>> But here in Arlington, Texas, is where we are generating quite a few chips for the cellular phone industry.
>> SMITH: So what have we got here?
>> This is a level-one clean room.
Here are some suits we can gown up in.
>> SMITH: Okay.
As we toured the plant, Conner told me that like most high-tech companies, National never offered its workforce a traditional lifetime pension.
It was among the early firms to latch on to the 401(k).
>> We had developed a retirement and savings plan as far back as 1975.
Over time, as the tax code has changed and legislation has evolved to meet the needs of employees' retirements, we have evolved with that.
And then today, it exists as a 401(k) plan.
>> SMITH: National Semiconductor has been aggressive in promoting its 401(k) with employees, achieving more than 90% participation.
National went beyond the typical dollar-for-dollar company match.
>> And what we found is that if we could provide an additional 50 cents on every dollar to the employees, that they would focus on it more.
We could raise our participation rates and we could actually get them to be responsible for their retirement.
>> Did everybody get one of these pink booklets?
>> SMITH: National makes a special effort to educate its employees on preparing for retirement.
This morning, a representative of Fidelity Mutual Funds, its 401(k) plan manager, is leading a workshop, and attendance is mandatory.
>> Now, before I get too deep into this, let me say this, and you know this: you're in the driver's seat of this 401(k), okay?
You're the pilot.
You're going to make all the decisions.
So what we're looking at here, these are just suggestions.
>> The responsibility is really on the employee to manage their dollars.
What we do is we provide tools and resources so that they don't have to become a professional money manager.
>> Everybody needs to have an investment strategy.
>> I listen to a lot of financial shows on the radio and television and stuff, and it's where I get most of my information.
And I...
I was actually surprised.
I...
I really didn't want to come, but I came, and he made a lot of sense, and there's... there's some strategies there that I'm going to... that I'm going to start doing.
>> I've been here 18 years, and when I first got in it, I just put my money in... in funds and didn't... didn't care about it, just walked away and left it there.
>> SMITH: How did you do?
>> It didn't do too good.
I think as I started consulting with other people, I found that you need to start watching your funds and seeing what kind of gains you're getting in.
>> Stocks are volatile... >> SMITH: Do you have any concerns about how well people are doing?
>> We're concerned every day with that.
That's why we provide the company match and the tools and the resources that we provide.
When you look at our program, it's much stronger than anybody else in the industry.
>> SMITH: But you're still concerned.
>> We're still concerned.
>> SMITH: Of course, the test of any 401(k) plan is how well retirees are actually doing.
So I went to call on some National retirees living nearby.
One was a former customer tech rep, Gil Thibeau.
>> Before I jumped into it, I did my own personal research on the computer and... and talked with other people who were in different plans and... and what was working best for them.
>> SMITH: Thibeau is the kind of employee 401(k)s are made for.
An engineer with a Masters in business administration, he was making more than $90,000 a year.
Over 14 years, Thibeau built up a nest egg of $450,000.
>> My retirement was a half a million because I got a start late.
I would have... if I had started earlier, I would have set my target at a million, but I waited too long, like I think most people do.
>> SMITH: But not far away, I found another National retiree living a very different kind of retirement.
Winson Crabb retired three years ago as a $50,000-a-year equipment technician.
During 16 years at National, Crabb says he faithfully funded his 401(k) plan.
>> My assumption was that when I got to be 65, well, there would be a large amount of money in there for me to take cash out to put in our bank to utilize for whatever.
Well, that didn't work out.
>> SMITH: But Crabb's wife, Bess, remembers the market dropping sharply in the two years before Crabb retired.
So, what's your recollection about the maximum amount there was in your husband's 401(k)?
>> $120,000.
That was our goal, and that's what was there.
>> SMITH: And then the market fell.
>> That's right.
>> SMITH: So, you lost about half of it.
>> Oh, we lost more than that, because it went down to $45,000, and we built it back up to $64,000.
And then, when... the day that he drew out the 401(k), it was $52,000.
>> SMITH: $52,000.
>> Yes.
>> SMITH: Things got worse.
Crabb had some debts to pay, and he got socked with a tax bill when he cashed out his 401(k) in a lump sum.
>> I just went with the information that I had and thought I was doing the right thing, which I wasn't.
>> SMITH: So, what'd you wind up with out of the $52,000?
>> I think it was $26,000.
>> SMITH: So, how do you manage financially?
What do you do?
>> Well, you do what you have to do, for one thing, you know?
You do...
I had some... a couple jobs in between there, and my wife works.
>> Well, I thought when he retired, it was going to be a lot different, you know, money-wise.
>> It was a jolt when we got to counting funds at the end of all that.
You know, one day, we had to set down and say, "Whew!
This is not like what we thought," you know.
>> SMITH: To stay afloat, Winson Crabb had to sell most of his beloved gun collection for $12,000.
You sold some of your guns.
>> Mm-hmm.
Sure.
>> SMITH: Was that hard?
>> Oh, broke my heart.
Yeah.
And, you know, that's... it's been my hobby since I was about eight years old.
I mean, that was like taking a part of my liver out or something, you know?
>> SMITH: I was curious.
Why would Thibeau and Crabb have such wildly different results with the same 401(k) plan?
In Dallas, I found the man with the answer, a corporate benefits consultant with 50 years of experience named Brooks Hamilton.
Originally, Hamilton had been a big believer in the magic of 401(k)s. But by the 1990s, he began to notice troubling differences among employees in the 15 corporate 401(k) plans that he was running.
>> They were all large plans with $100 million, $200 million in the plan, and 1,000, 2,000 participants or more.
So these were big plans and they were scattered geographically, some up east and some on the west coast.
>> SMITH: Hamilton dug deep into his 401(k) records, analyzing investment yields for every single worker in every single plan.
>> We saw the same thing over and over.
Say the bottom 20% had an investment return for the year-- for the year-- of 4%.
The top 20% would be anywhere between five and seven times that number.
>> SMITH: Like 30%?
>> Yeah 30%, right.
>> SMITH: According to Hamilton, the huge differences between Thibeau and Crabb reflected a far larger problem.
>> In every case, the 20% at the top not only had the highest investment income, like 30% or whatever, they also had the highest average annual pay; whereas the bottom 20% not only had the lowest investment income, 4%, they had the lowest average annual pay.
>> SMITH: So what you are saying is the best-paid people, the richest people, are getting richer and the middle-class workers are falling further behind.
>> Yes, that's exactly what I'm saying.
I label this "yield disparity."
I just coined the term.
I thought we have a yield disparity that is a financial cancer in this... in our great, beautiful 401(k) movement.
And I had never seen it before, but it was everywhere I looked.
>> SMITH: What do you mean a "financial cancer?"
>> It would destroy the opportunity for ordinary workers to retire in dignity.
They couldn't get there from here.
>> SMITH: It's a huge problem.
Half of America's workers are not covered by any retirement plan, 40% are enrolled in some 401(k)-style plans, and according to the latest report from the Federal Reserve, the average family's account balance is only $29,000.
And it's not just average Americans who have trouble making a 401(k) work well.
Even the experts have trouble.
>> I have made virtually every mistake that I look out there and see other people doing.
It's... we live busy, complicated lives.
Saving for retirement is a really hard thing to do.
>> SMITH: Yeah, what's gone wrong?
>> Everything.
Everything has gone wrong.
The individual has to make a choice every step along the way.
The individual has to decide whether or not to join the plan, how much to contribute, how to allocate those contributions, how to change those allocations over time, decide what to do when they move from one job to another, think what to do about company stock.
And then the hardest thing, which we haven't even gotten to, is what are they going to do when they get to retirement and somebody hands them a check?
How do you figure out how to use that over your retirement span?
>> SMITH: So, what you're suggesting is all this individual control may not be such a good idea.
>> Well, the numbers aren't very encouraging.
>> SMITH: For a hard look at the numbers, I visited a leading Washington think tank on pensions and retirement issues, the Employee Benefit Research Institute.
>> Watching an entire generation of retirees... >> SMITH: Jack Vanderhei is a research fellow.
At his fingertips, Vanderhei has a huge database on employee benefits.
>> Right now, we have data on 16.5 million participants from about 45,000 different 401(k) plans.
>> SMITH: Wow, that's a lot.
Okay, when you look at that data, what do you find out about the generation that's just about to retire, folks between, like, 60 and 65?
How much have they saved in those 401(k) plans?
>> On average, it turns out that approximately three times what they have as their final salary is what their account balances are for those currently on the verge of retirement.
>> SMITH: So if we're looking here at people making $40,000 to $50,000 a year, they've got $120,000, $150,000 in their 401(k).
>> Right.
>> SMITH: So, will... how many years will this cover them?
>> Seven to eight years.
After that, you basically have nothing but Social Security.
>> SMITH: And what's life expectancy if you retire at 60 or 65?
>> Around 17 years.
>> SMITH: So, we're talking a gap, eight or nine years where these folks are going to be just down at Social Security level.
>> For those that don't have anything else other than Social Security and these 401(k) plans, that would be correct.
>> SMITH: What workers need to save up, says Vanderhei, is more like eight times their average pre-retirement salary.
For that, you need to sock away a lot more than what most people are doing.
So, whatever you're doing, you're saying 14% or 15% a year is what you're going to need to be putting in 30 years in a row.
>> Combined employer/employee, that's correct.
>> SMITH: Pension expert Brooks Hamilton puts the figures even higher.
>> 15% to 18% of pay.
>> SMITH: 15% to 18% of pay?
>> Yeah.
>> SMITH: Most plans think they are doing a good job if, combined, the employee and the employer are putting away 9%, 10%.
>> Yeah, yeah.
They're... they're half what they need to be.
>> I would say, unless you're fortunate to be in the upper-income quartiles, that you're probably going to be in for a very rough ride.
>> SMITH: And what does "a rough ride" mean?
>> A "rough ride" means you're not going to have sufficient monies to pay the predictable expenses-- your housing, your utilities, your food-- plus the potential catastrophic medical care costs that you might be burdened with, with things like a nursing home.
>> SMITH: And you're talking about the middle of America.
>> Absolutely.... >> SMITH: They're in for a rough ride?
>> Very rough.
>> SMITH: The biggest problem is low participation.
Masses of ordinary workers are left without any 401(k) plans.
But even those who get offered one typically do not put in enough money.
>> Between 25% and 30% of people who could join these plans don't join the plans.
Of the possibility of contributing the maximum, less than 10% of people contribute the maximum.
>> SMITH: Another serious problem is what's called "leakage."
Too often, the 401(k) savings account becomes the rainy day account.
>> Half the people, when they move from one job to another, take the money out of their 401(k).
Now, they may even use it for something good.
They may use it for further education or they may use it in a down payment for a house, but it means it's not there when they come to retirement.
>> SMITH: Add to that the huge difficulties ordinary people have in doing their own investing.
>> I used to ask the C.E.O., C.F.O.
of my major clients, often in an environment, conference room, some young employee would bring in coffee and all, and as they would be leaving I would ask the C.E.O., "Fred, let me ask you.
"Would you allow that employee to direct the investment of your account in the 401(k) plan?"
And they always thought I was some kind of idiot.
It's kind of like, "Don't they teach you anything "down in Texas, Brooks?
"Of course not.
I wouldn't let him touch my account with a ten-foot pole."
And I said, "Well, but you force them to manage their own, and they're running their money into the ground."
>> SMITH: The roots of the problem, some say, lie in how the 401(k) system was born in Washington.
Originally, it was not set up to have millions of us managing our own retirement.
>> 401(k) plans were originally introduced as supplemental plans.
No one ever said, "Oh, let's end these traditional pensions and replace them with 401(k) plans."
>> SMITH: The 401(k) first emerged as an arcane sub-paragraph in the fine print of the tax code in 1978, intended as a technical fix to protect a tax shelter for executives at Kodak and Xerox.
No one expected it would lead to a retirement revolution.
>> The 401(k) provision came about like lots of changes in the tax code comes about, which is a company has a particular problem and a particular issue, particular to them, they come to Congress, to their senator, and they start ask... they start asking for their loophole.
>> SMITH: Under more corporate prodding, the Internal Revenue Service ruled in 1981 that savings from regular salary checks also qualified for the 401(k) tax shelter, and that opened the floodgates.
>> It electrified the industry.
It electrified guys like me.
It electrified the professional infrastructure of the benefit industry because it was, "My God, do you realize a worker can now deduct savings for retirement?"
>> SMITH: The pitch to corporations was that the 401(k) would save them big money.
The new 401(k)s would cost them less than half as much as the old lifetime pensions, which cost companies about 6% to 8% of payroll.
>> And the same company, let's say, terminated their pension or froze it or abandoned it or whatever, put in a 401(k) plan.
They probably were putting in 2% or 3% of payroll, because not everybody was in the plan.
>> SMITH: And the pitch to employees was ownership: take charge of your future, own your own savings plan, get free money from your employer.
>> It had a lot of sex appeal, and it was power to the people and it empowered the worker.
And that's the way it was was presented and that's the way it was sold.
>> Maybe you like high-tech, health care, or the electronics sector?
>> SMITH: The 401(k) rocketed upward on the powerful convergence of a roaring bull market, computer software which spat out daily stock quotes for individual accounts, and the marketing muscle of mutual funds.
>> Call 1-800-FIDELITY.
>> All of us in America looked at that booming stock market and wanted to be part of that.
The 401(k) participants were exactly the same way.
And so there was just a true boom in interest in 401(k)s as a way to invest in equities.
>> They are going to charge you for this service.
There is a fee.
>> SMITH: What got lost in the euphoria was the enormous shift in who was now paying for retirement.
A Labor Department study documented how the burden had shifted since the heyday of lifetime pensions.
>> Of all contributions being made, the worker put in 11%, the company put in 89%.
That was in '74.
Fast forward to 2000, and the same source of data, the Department of Labor, the same said that of all contributions being made today, workers are putting in 51%, companies 49% of all the contributions.
Since '74 to 2006, there has been a cost-shifting of 40% from contributions made by the employer to contributions made by the employee.
>> SMITH: You've got to be talking hundreds of billions of dollars.
>> Oh, huge.
Yeah, yeah.
>> SMITH: I mean, am I right?
Hundreds of billions of dollars?
>> Yes, that's correct.
>> SMITH: Lately, the media is full of stories about corporations flocking to the 401(k).
>> More and more companies dumping their traditional pension plans.
>> SMITH: Healthy blue-chip companies like IBM and Verizon froze their old lifetime pensions and turned to 401(k) plans.
>> The move is designed to save the phone giant $3 billion over the next decade.
>> The trend is turning traditional pension plans into an endangered species.
>> SMITH: And that trend sparks debate, bringing warnings of peril.
>> For boomers who are middle income boomers who have only 401(k)-type plans and don't have the traditional lifetime pension, they're at risk.
And I am alarmed by what I see, because they are not prepared to face the length of their retirement.
They are not prepared to face the expenses they will likely face.
This is a generation that may well end up depending on Social Security alone.
That's not going to be very satisfactory to them, or to us as a society.
>> SMITH: Big drop in standard of living.
>> A big drop in the standard of living for many people who thought of themselves as middle class.
>> These 401(k) plans were initially supplementary plans to these basic pensions, so it was fine if you left all of the decisions up to the individual.
What's happening is the old-fashioned pensions have disappeared, and so this plan that was sort of a supplementary plan is now everybody's basic plan.
And it's so poorly designed because it was never designed for... to be the mainstay of people's retirement.
>> SMITH: David Wray, head of the profit-sharing 401(k) Council and a long-time 401(k) booster, argues against a rush to judgment on the 401(k).
>> The reason is because most people haven't been in the system that long.
I mean, we talked about the real explosion in the system is in the early '90s.
These people haven't been in the system long enough to take advantage of that long-term compounding.
I mean, let's face it, older baby boomers are really going to have to put the savings pedal to the metal.
And that's why, you know, we have special programs so they can contribute more to the programs and stuff.
But they weren't in the system long enough.
>> SMITH: But in my travels, I had found evidence that it may not be just a question of time.
>> Good morning, everyone.
>> SMITH: Back at that workshop in Nebraska, I had learned that Nebraska had 40 years of experience with a 401(k)-style defined contribution plan for state employees.
>> And I hope you have some time left before you actually retire.
>> SMITH: Nebraska is a unique laboratory.
For 40 years, it has run two different kinds of retirement plans side by side-- some employees covered by the traditional lifetime pension; others by a 401(k)-style defined contribution plan.
Both were top-notch plans with mandatory participation and contribution levels and a 7% employer match.
But the state was still concerned.
>> The state legislature commissioned what is called a benefit adequacy study.
They wanted to have a consultant look at all of the plans and determine the adequacy of the benefit that the state was providing.
>> SMITH: The study showed that lifetime pension plans with professionally managed investments did far better for employees than the 401(k)-style defined contribution plan.
>> We have had experience since the mid '60s, and the people retiring from our defined contribution plan do not have the kind of an account balance, which is basically what a defined contribution plan gives them, an "account balance."
It isn't sufficient for them to live on in retirement.
It's just not adequate.
>> SMITH: 40 years hasn't done the trick?
It... it's not a matter of time.
>> I don't believe it's a matter of time.
I believe it's a matter of understanding what it takes for the employee to take a hold of this and utilize it and earn the kind of return that they need to have.
You're talking people who are not investment professionals.
>> SMITH: After the study, Nebraska ended its 401(k)-style plan for new employees and allowed old 401(k) participants to shift to the lifetime pension plan.
>> There is nothing wrong with the traditional defined benefit plan.
It works if it's done right.
>> SMITH: David Wray is doubtful.
He asserts that much of corporate America has already abandoned lifetime pensions as too expensive.
>> In a global competitive environment, that's... you can't do that.
You have to have the financial flexibility to spend that money on new redesign of some product, not putting money into a benefit plan.
>> Any questions about the basics of the plan?
I want to try to simplify this for us.
>> SMITH: But Wray concedes that the 401(k) system must be reformed.
>> Well, I...
I don't shy away from the fact that there are flaws that need to be fixed.
I shy away from a representation that the system is fatally flawed, because it is not.
The system is not fatally flawed.
Like any other system, you have to make it work, and you have to learn and improve it.
>> They're adding a new feature to your plan.
It's called Retirement Plan Manager.
It's where you're handing the reigns over to Fidelity.
>> SMITH: But David Wray says the path to real reform is putting employers firmly in control of 401(k) plans.
>> The system is going to where employees do nothing and good things happen.
Money is going to be taken from their paycheck and put into these programs.
And then it's going to be automatically invested in a... in an appropriate, diversified program on their behalf.
>> SMITH: So, it sounds to me that if you move to a system where the employer is, by default, putting employees into the 401(k) plan, determining their level of participation and then managing the money, we're virtually back to a defined benefit plan, except that the employees are footing 50% of the bill and they've got all the risk at the far end, instead of the employer.
>> Well, I don't know.
I think people still like the ownership.
But the question is, do they really want all that choice?
Do they want all that responsibility?
And what we're finding is they don't.
They want the employer to do that for them, and that's where the system's going-- back to where it was in the old days.
>> SMITH: For most workers, Wray's reforms haven't happened yet and may never happen.
What's more, some experts question whether the 401(k) system is capable of carrying the burden of being America's retirement system.
>> I regret the fact that our strategy now, our retirement income strategy in major companies, is the 401(k), because I think it may be fatally flawed.
I know that there's a growing number of people who feel it's not fixable, that it cannot be fixed.
>> The whole retirement system, in fact, in the country is in, I think, very poor shape, and it's going to be the next big financial crisis in the country, I honestly believe.
I don't see that the... our administration or our Congress is giving it the attention that it really has to have.
I don't think anybody has a crisis kind of an attitude toward this.
>> SMITH: Meanwhile, millions of ordinary Americans are facing the crisis of retirement on their own, and the options are few.
Pat O'Neill is still behind the wheel.
>> I'm not unique.
There's people all across this land that are in the same boat I'm in.
Didn't see it coming, and they just really... their back is against the wall.
So they got to do what they done all their life, is they got to go to work.
>> SMITH: Winson Crabb is leaving Texas for a new job in another computer chip plant.
>> I'm going to New Mexico to work in a chip plant again as a safety officer.
>> SMITH: Here you are, 68, retirement years, heading off to a new job like a young guy at 28.
>> Yep, yep.
>> SMITH: And Robin Gilinger is worried about what lies ahead.
>> I feel very uneasy about where I'm going to be in 20 years.
And I'm afraid that I'm going to end up having to work my golden years doing things that I didn't necessarily want to be doing.
>> Baby boomers will be facing a very different kind of retirement life than their parents.
The research shows that they might be able to keep the same amount of income relative to what they earned.
So the middle class baby boomer may also maintain their middle-class lifestyle into retirement.
But there is one big difference: the only way they can do it is if they work.
The only source of income to retirees-- and I understand the irony in what I am just going to say-- the only increasing source of income to retirees is from work.
>> SMITH: Working longer?
>> Working longer.
So what is the meaning of the word "retirement" if the only way you can live in retirement is to work?
The answer is there is no meaning to retirement anymore.
We are now shifting from lifetime pensions to lifetime work.
It's the end of retirement.
>> In August, Congress enacted the Pension Protection Act of 2006.
The new law aims to tighten rules for corporate pension plans and increase employee participation in 401(k)s. But critics warn it may weaken the corporate pension system and shift more of the cost of retirement onto workers.
>> Next time on Frontline... >> He's been so vehemently anti-gay... >> A conservative mayor... >> And now we find him on gay.com.
>> ...an aggressive newspaper... >> What if he's using the internet to have sex with underage boys?
>> ...and a story that took apart a man's life.
>> The worst thing you can say about somebody is that they're a sexual predator.
How do you refute that?
>> Frontline examines the conflict between the public interest and "A Hidden Life."
Next time on Frontline.
>> To order Frontline's "Can You Afford to Retire" on video cassette or DVD, call PBS Home Video at 1-800-PLAY-PBS.