What a difference 10 days makes. In September, a turbulent 10 days on Wall Street set the nation reeling as the floor fell out of the financial system (see sidebar for timeline of the crisis). Months later, amid the fallout - in addition to the financial pain already being felt from declining home values and rising food and gas prices - is record unemployment, massive retirement asset losses, credit concerns for employers and a complete restructuring of the nation's finances.

Taken together, it's a set of circumstances no benefits professional would ever wish for. Nonetheless, HR/benefits pros find themselves smack in the middle of dealing with the result of the financial crisis - with employees on one side worried about their jobs and retirement security, and cost-cramped executives on the other seeking to save every dollar while waiting for falling shoes.

Alan Glickstein, senior retirement consultant for Watson Wyatt, sums it up simply: "We are in uncharted territory."

Trillions lost

Among the more acute effects of the current crisis is the considerable loss of retirement wealth - specifically, $2 trillion in the last 15 months, according to the Congressional Budget Office.

Most recently, the Employee Benefit Research Institute finds that through September, 401(k) participants lost an average 7.2% to 11.2% from their account balances. The losses were most painful for workers age 36 to 45, EBRI research director Jack VanDerhei concludes, while employees closest to retirement (age 56 to 65) were least affected.

Pension plans also have taken a hit. The Federal Reserve finds that between the second quarter of 2007 and the second quarter of 2008, public pension assets have tumbled more than $300 billion.

As a result of the stock market decline and shrinking dispensable income, many employee-investors have stopped saving for retirement altogether. A survey from AARP shows that 20% of workers age 45 and older have stopped contributing to their 401(k) in the last year, with 13% of that group using the siphoned funds to pay for daily expenses. Another 34% have delayed retirement, AARP reports.

"The current economic situation is depleting what little [retirement savings] individuals have," says Jean Setzfand, AARP director of financial security. "Many people are making quick-fix decisions that put their financial future at risk."

A September report from consulting firm Aon comes to similar conclusions, finding that 40% of employers that offer a defined contribution plan post a participation rate of less than 70%. Some 67% of employers polled freely admit that most employees not participating don't contribute because they can't afford to.

"It's not surprising that employees may sacrifice retirement plan contributions to fund other necessities," says Cecil Hemingway, Aon executive vice president and retirement practice leader. Still, even with the limping economy, "a mark of less than 70% [participation] indicates a poor plan, poor communication or both."

In an October hearing of the House Committee on Education and Labor, the financial downturn and resulting impact on Americans' retirement security was front and center.

During the session, testimony varied on how to move forward to stabilize workers' retirement assets.

Jerry Bramlett, president and CEO of BenefitStreet, said greater employee education is needed to help investors understand the market and the fact that volatility is normal. "401(k) participants are not investment experts, [and] there is a danger that many of them will overreact to this market downturn," he said. "For participants with many years before retirement, a drastic abandonment of equity positions will only serve to lock in as-of-yet unrealized losses. Markets do go up and down, and 401(k) participants must remember to think long-term."

Christian Weller, associate professor of public policy at the University of Massachusetts-Boston encouraged greater help for employers. "More and more should be done to encourage employer contributions, either as matching or nonmatching contributions." He left all options on the table, including mandating employer contributions.

However, Teresa Ghilarducci, professor of economic policy analysis at the New School for Social Research, offered the most bold solution. She proposed that Congress establish universal retirement accounts for all workers, with a mandated 5% of employee pay and $600 annual contribution from the government deposited each year. Her proposal would eliminate 401(k)s. "The sooner we admit that our 30-year experiment with 401(k) accounts has failed, the sooner we can use these precious government subsidies efficiently and equitably," she said. (Read the upcoming January EBN for additional reporting on Ghilarducci's proposal.)

Whatever solutions progress forward, Rep. George Miller (D-Calif.) acknowledged some kind of assistance is necessary, given the severity of the economic outlook. "Unlike Wall Street executives, American families don't have a golden parachute to fall back on. It's clear Americans' retirement security may be one of the greatest casualties of this financial crisis."

Credit concerns

As the credit crunch squeezes tighter, another casualty could be employee benefits. A recent survey of CFOs and senior comptrollers by Grant Thornton LLP shows that 55% say credit costs have increased, and 64% say credit is harder to come by than a year ago.

As such, 47% of the execs forecast the economy will remain the same over the next six months, and they are focused on cost pressures. Most (55%) list benefits as the biggest pressure point, followed by energy and raw materials.

"The current upheaval in the credit markets is analogous to riding a rollercoaster for the first time on its way down a steep hill," reads a new Grant Thornton guide featuring tips on weathering the crisis. "It has everyone holding on tight, hunkering down, with a sick feeling in their stomach and wondering when the worst will be behind them."

Still, the firm asserts, "with careful planning and foresight, [employers] might even be able to turn conditions to your advantage."

Among suggestions:

• Cash is king. If you have cash on your balance sheet, you have a greater degree of flexibility in your decision-making.
• Control costs aggressively. Tough economic conditions require a razor-sharp focus on cost-containment at a minimum, and cost cutting where possible.
• Evaluate customers and suppliers. Understand the financial well-being of customers and suppliers.
• Educate yourself on tax issues. Know how to reduce liabilities and take advantage of tax credits.
• Reconsider capital investments. Investing in new assets in a downturn can place pressure on cash reserves and contingency funds.

Rethinking retirement

The financial downturn doesn't just have employees reconsidering their retirement options; employers are rethinking their retirement benefits offerings as well.

In October, GM halted its 401(k) match, a move some experts believe will be emulated by other companies. In addition to reconsidering matching contributions, a recent report from Watson Wyatt finds that the crisis has recast

the pros and cons of retirement plans entirely.

"Broadly speaking, the predictable, mainly guaranteed, income of pensions - including so-called hybrid plans like cash balance plans - contrasts sharply with the day-to-day fluctuation of 401(k) account values, which are wreaking havoc on planned retirements."

Glickstein asks: "What happens when market volatility makes 401(k) investment returns and retirement income anything but predictable?"

"The current environment underscores some latent employer risks with 401(k) plans," he continues. "For example, they make it harder for companies to predict who will retire and when. Employees who mostly rely on 401(k)s are also more likely to worry about their financial security, creating an additional drain on morale and productivity during turbulent times."

On the pension side, employers are dealing with new funding rules that require them to fund their pensions based on the value of plan assets relative to liabilities. Companies can only average returns over a two-year period, and the averaged assets cannot exceed current market value by more than 10%.

The new rules are much closer to the so-called mark-to-market rules that have been implemented in corporate accounting with respect to the balance sheet. However, "the federal bailout of the credit markets is an acknowledgment that in extreme cases, the mark-to-market principle does not work," says Kevin Wagner, a senior retirement consultant at Watson Wyatt. "This crisis should increase pressure generally to revisit mark-to-market principles. Without some relief, a sustained downturn in asset values will noticeably increase required contributions to pension plans starting next year, when plan sponsors will also be facing significant business pressure."

Robyn Credico, national director of Watson Wyatt's defined contribution practice, says employers should take a deep breath before making any changes, though. "We are in a very litigious environment, and the sharp market downturn will only fuel matters. Now is not the time to switch 401(k) vendors or change investment choices unless absolutely necessary. The market is too fluid."

Bailout affects benefits

In an effort to stem the tide from the market washout, rescue failing banks and prevent a deeper economic plunge that would more severely affect everyday consumers, President Bush in October signed the Emergency Economic Stabilization Act.

Although most prominently known for approving $700 billion in funding to suck up toxic mortgages, the law also contains some important nuggets for benefit pros regarding executive compensation.

The new standards, which affect CEOs, CFOs and the next three most highly paid executives, apply to companies that sell bad mortgage assets to the Treasury Department. Such companies would be:

• Prohibited from entering into new exec contracts that include golden parachutes.
• Disallowed from deducting more than $500,000 for each senior executive for tax purposes.
• Required to impose a 20% excise tax on senior execs for golden parachute payments.

Other, more detailed requirements are outlined on the Treasury Web site, www.ustreas.gov. John O'Neill, a legislative partner with Washington, D.C. law firm Venable LLP, says companies are "holding their breath about the scope of assets and investments covered," by Treasury. "Right now, the plan [addresses] the government's purchase of residential and commercial mortgages, but there has already been considerable debate about expanding it to cover other assets such as financial instruments related to auto loans, credit cards and student loans," he says. Such an expansion "could significantly increase the power and importance of this legislation on corporate America."

Market timing: Timeline of the financial crisis

» Sept. 7: Federal takeover of mortgage giants Fannie Mae and Freddie Mac.

» Sept. 14: Merrill Lynch sold to Bank of America.

» Sept. 15: Investment banking titan Lehman Bros. files for bankruptcy.

» Sept. 16: AIG credit is downgraded over losses from mortgage-backed securities.

» Sept. 17: Federal Reserve loans AIG $85 billion to avoid bankruptcy.

» Sept. 19: Treasury Secretary Henry Paulson unveils financial bailout/rescue plan that would be funded by $700 billion in taxpayer money.

» Sept. 25: Washington Mutual seized by the FDIC and sold to JPMorganChase.

» Sept. 29: House defeats EESA 228-205.

» Oct. 1: Senate passes its own version of EESA.

» Oct. 3: EESA approved by House and signed into law by President Bush.

Further reading

For more EBN coverage on the fallout from the financial crisis, read:

• Outrunning the bear: Financial planner offers employers 4-point plan to communicate to nervous employee-investors for surviving the bear market
• Riding the retirement rollercoaster: Financial advisers provide retirement planning tips - and reassurance - to executive, average Joe boomers
• Investment white out: 'Plain vanilla' funds attract fearful investors

Also, visit ebn.benefitnews.com/podcasts and employee benefitnews.blogspot.com for exclusive audio, and news and views.