How a United Airlines pilot turned advisors is helping colleagues grapple with pension nightmares.
Sometimes it's not so easy wearing two hats, even if you do it with a little bit of grace and ease.
Just ask Robert Thomas. Three days a week, the veteran Denver-based pilot dons a United Airlines cap to fly 767s for the company he's called home for more than two decades. But for the last three years, Monday to Friday, he's also worn the hat of a financial advisor. Last year, he joined AIG Financial Advisors as a CFP-certified advisor, where he works with investors, many of them current or retired United pilots.
Both jobs make him keenly aware of the gaping shortfall United's bankruptcy will create in his own pension plan, not to mention the pensions of his wife, Elizabeth, a retired United customer service agent, and their many friends who are fellow pilots and United workers who have been severely impacted by the company's bankruptcy. All told, some 122,000 United workers and retirees will be affected by the insolvency and subsequent takeover of United's pension by the Pension Benefit Guarantee Corporation. Understandably, this pilot-turned-advisor is worried about a lot of those folks.
In many ways, this is the crossroads of Bob Thomas's life. For better or worse, it mirrors the lives of many first-wave baby boomers who are now finding themselves without the retirement safety net they'd counted on for decades. While United has been the longest airline bankruptcy case in history, it's not the only company that's run aground, handed its pension over to the PBGC or seen its stock plummet to historical lows.
The breadth and depth of companies that have plunged into financial despair, often taking employees and retirees with them, has run the gamut from Enron and Worldcom to Delta, Northwest and, some predict, GM. Advisors and other financial experts are concerned that municipalities may soon follow suit, declaring their own form of insolvency. Even corporate survivors, IBM among them, have made it clear that eliminating pensions is critical to their survival (the company announced in January it will freeze its defined benefit plans in 2008 and give employees greater 401(k) incentives instead).
"This retirement stuff isn't all we thought it was cracked up to be, is it?" says Thomas, a former Air Force fighter pilot who flew in the Viet Nam war for three years.
It's with a touch of irony that Thomas considers himself luckier than some of his colleagues, to have his career as an advisor taking off just as friends and co-workers need him-and ironically, just as the reality of the PBGC takeover of United's pension and the elimination of retiree health-care benefits sets in.
Like many of his fellow pilots, Thomas's pension will be cut some 70%, from $7,000 to $2,263 a month, when he retires from United this August at age 60. His wife's pension will be shaved from $1,800 to $1,600 a month, under PBGC rules.
These days, the most anyone is going to get in pension benefits from the PBGC is about $45,000 annually. But pilots' pensions are hit particularly hard under a bureaucratic Catch-22: While federal law doesn't allow them to work past age 60, PBGC rules say that if they "retire early," before age 65, their pension benefits will be pared back.
On top of the huge hit to expected retirement income-and the cuts may get deeper as the PBGC's own billions in unfunded liabilities mount-Thomas and his colleagues at United have already taken a 50% pay cut. "We've always saved and planned, so we've been very fortunate," says Thomas. "But some people are in incredibly terrible shape. They're devastated by this. They're having to sell homes, take kids out of school and go back to work or take second jobs."
It's not what we thought it was cracked up to be, indeed. In fact the guarantee of a pension-rich retirement and steady monthly income, along with retiree health-care investments, has all but evaporated for the first wave of retiring baby boomers.
"This is the generation that got caught in the middle," says Dr. Conrad Ciccotello, director of Graduate Personal Financial Planning Programs at Georgia State University. "They're being buffeted by pay cuts, decreasing stock prices and shrinking pensions and benefits. The hidden story here is underdiversification. We don't always think of pensions that way, but we're seeing this story play out at company after company, and government [employees] may be next."
As 70 million baby boomers roll into retirement over the next two decades, planning opportunities and potential pitfalls abound. For those who have already taken the plunge into retirement, their employer's bankruptcy may mean making the best of bad medicine, often downsizing lifestyles and working a lot longer than may have been anticipated. For those approaching retirement with their pensions and companies still intact, advisors like Thomas are taking aggressive measures to convince investors to diversify stock and pension holdings whenever and wherever possible.
Sometimes it's an easier sell than others. "I think Bob is going to help a lot of people. He helped me," says Pete Jarldane, a retired United pilot who launched his second career as an estate and tax planning attorney upon retirement in 2003. "Whatever Bob said to do, I did. He turned things around for me. He said 'Get rid of it all (Jarldane's United stock)' and I did, and I'm not looking back."
The two professionals are starting their second careers relatively late in life, but both act relatively young and vigorous. Importantly, both also enjoy what they are doing. They share clients, many of them United pilots, with Jarldane doing the tax and estate planning and Thomas the financial and investment planning. The fate of United employees and retirees and what can be done for them is never too far from their minds as they build these second careers around the lives of the people they've flown with for decades.
Like Thomas, many advisors believe that investors should take lump-sum rollovers from pension plans, even when the company is at the top of its financial game. But it's not always an easy sell, getting veteran executives to shed their ties-pensions, stock and all-to a company that has often times made them wealthy.
"There are just tons of pharmaceutical executives in our backyard working for Merck and Pfizer and J&J. I tell them: 'You've ridden this horse for all these years. Now, you've won the race. You can retire. Why do you want to leave all of your risk there?'" says James W. Reilly, a wealth manager with Chatham, N.J.-based RegentAtlantic, which manages $1 billion in client assets.
Only five years ago, drug companies were considered recession-resistant and benefited from a tailwind of biochemical breakthroughs coupled with a demographic tidal wave. But since May of 2001, the shares of Pfizer have plunged 43% even as its profits have risen, while Merck's Vioxx problems have battered its shares.
"If I was a retiring executive today, I'd seriously be asking myself, 'Can I afford to leave my money in a defined benefit plan, or for that matter concentrated in company stock, when I have no idea what will happen ten or 15 years down the road?'" Reilly says.
What's the worst that can happen to someone lucky enough to have what appears to be a generous pension? A company will run aground, the PBGC will freeze lump-sum rollovers and a retiree, or near-retiree, will be stuck with a maximum pension payment of $45,000. Unfortunately, the safety net of a pension also can serve as a reason not to save. "You really have to do financial planning with these folks and ask, is this person financially independent or will they be impaired if their pension is reduced this way?" Reilly says.
When clients opt in favor of lump-sum rollovers with RegentAtlantic, they receive a globally diversified, multi-asset class portfolio with a mix of stocks and bonds. "That's what we do for 90% of the people who roll out," Reilly says. "They have a lot more estate planning flexibility and, when they die, their heirs will get their legacy, unlike with a pension, which is retained by the company."
The other 10% of Reilly's clients want 50% of their rollover in a diversified portfolio and the other 50% in Treasury strips (currently yielding 4.3%), to ensure income. He'll also use collars where appropriate, with executives who come in with large, highly appreciated stock holdings from their employer. The portfolio strategy locks in the downside risk and allows the investor to borrow against value to create a diversified portfolio.
And, of course, there is always the sale of stock to consider. "We want to aggressively harvest tax losses wherever possible, but clients have to begin to chip away at their large positions," Reilly says.
He is using both a collar and a fairly aggressive sales strategy with a retired UPS supervisor who came in the door with $5 million in company stock. "The stock went from $90 down to $75, so we saved him the 20% loss, but we really did this to get him into a diversified portfolio. He sells about $100,000 a month. I don't think the capital gains tax is ever going to be less than the 15% it is today. You have to take the hit. Now he has a diversified portfolio.
"The big hurdle is convincing people that the company that got them where they are today can go away," Reilly says. "Lucent was the worst case for us. People lost their jobs and seven-figure portfolios because they were so tied up in stock, both outside and inside the company pension."
Even though there was no PBGC takeover, the financial result for many Lucent executives and rank-and-file workers was devastating. Layoffs whittled away some 70% of the Murray Hill, N.J.-based corporation's 153,000- person workforce just as the stock price declined 83% in five years.
For United pilots who have lost 70% of their pensions in the PBGC takeover, but are required to retire anyway at age 60, the impact often has been devastating, Thomas says. "Pilots who don't have another professional career to go into are looking for corporate flying jobs. Are they in high demand at age 60? They're highly experienced which is positive, but their age can be a negative," he explains.
It's a time of reckoning, Thomas says. "No one feels good about this. Everyone had expectations of more. But it is what it is. That's the hard thing to get clients to realize. We have to press on from this point. We all know we're going to go on living," Thomas says.
The first thing the pilot cum advisor does with United clients is get them to focus on what they have and what they will need to live. "You have a fixed amount of cash. Is it enough? Do you need to work longer? Do you need to downsize your house?" Some people really go to the max with debt, so I do cash-flow counseling, even with high-income people when it's needed."
Then he builds customized, needs-based portfolios. "I have one pilot who's been retired two years. He's been a client for three-and-a-half, and we've made some good decisions, so he doesn't have to go back to work. He came in the door with assets, so we created a portfolio with a low standard deviation. Now he's drawing an income that comes close to offsetting the reduction he'll take in his pension."
It's worth noting that Thomas passed the coursework for the CFP years ago and has been saving, investing and living well within his means while managing his own portfolio for decades. What Thomas' clients can count on is the fact that he will make the most of any opportunity he can create for them.
When he decided to get his CFP certificate, he worked at an advisory firm three days a week doing analysis and planning. No feat in itself, except the firm, Dixon & Co., is in Houston. Thomas lives outside of Denver. But he set up his flight schedule to make it happen and never looked back. "I've known Bob for years and told him several years ago he should become an advisor because he has great people skills and very strong analytical ability," says Charles Dixon, president of Dixon & Co. "I have no doubt that Bob will save the lives of several of his fellow men in the next few years." Dixon, keeps a Wall Street "buy" recommendation for Enron stock on his desk to remind him that "the only true silver bullet is diversifying every investable asset." He got the buy recommendation from Paine Webber a week before Enron imploded. He owned shares, as did a number of clients, some of them Enron executives.
"The company filed for bankruptcy, but nothing is decided regarding the pension plans, so employees' assets are essentially just locked up," he says. Now, when clients come in the door and can do lump-sum rollovers or in-service distributions, Dixon strongly encourages them.
Of course, not everyone will be helped. No planner with even a handful of corporate executive clients is without a story of an investor who just wouldn't listen to reason regarding their risks.
The hardest thing to get people to do is sell stock, especially if the price has dipped, says Steven Burnett, president of Hanson McClain, a financial advisory firm that manages $985 million in assets for many telecom and tech executives in Sacramento. "We did workshops in '98 and '99 for Lucent executives who told us even if their stock dropped by 50%, they'd outperform the S&P (the price has dropped some $77 a share since 2000). We saw a ton of Intel executives, and we'd build strategies with straddles and options to protect them, but many wouldn't do it. We had clients at Verizon who would not take lump-sum pension distributions. Then their plan was frozen and they lost that option, at least for now. We've seen clients do rollovers and then buy the stock again," says Burnett, who says it's up to advisors to continue to hammer home the dire necessity of diversification.
The silver lining in all of this turmoil, if there is any, will be the greater emphasis on and understanding of 401(k) benefits, now that they're becoming the only game in town. "Bigger matches, more investment options, the rise of independent advice and automatic investing, all of these things will work in the favor of future generations," Professor Ciccotello says. While investors may still risk inertia and poor investment choices, no corporation will be able to borrow their funds, reduce their payouts or bankrupt their retirement.
Which is why it's very important for advisors to stay in tune with client 401(k)s years and years before retirement, says Tim Chapman, chairman of PMFM 401(k) Toolbox, in Athens, Ga. Chapman, who works with Delta's 401(k) plan, does two workshops a month for Delta pilots and workers, to help them decide what to do with their retirement savings. The carrier filed for bankruptcy in September (the same time as Northwest Airlines). Options are fewer and further between for those entering retirement, since Delta's pensions are frozen for now, pending a possible PBGC takeover, but that makes planning for assets outside that pension all the more critical.
Thomas can relate, all too well, to the angst and anxiety of losing a corporate parent. For the United folks coming into his office in their forties, "We'll have 20 years to work with them and make up the deficit," he says.
For those already in retirement, it will depend on what type of investor they've been up until now, and what other opportunities they've created for themselves. "For years, they've been counting on this big pension and there is a lot of disappointment. But I'm trying to motivate them. I tell them 'All is not lost,'" he advises.