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How Top Execs Game Retirement Plans

January 3, 2012

by Michael Edesess

Are we only haggling about the price?

When we hear or read stories like this – unless we are the very people involved – we imagine a coterie of demonic figures coldheartedly calculating ways to impoverish millions so that they themselves can become rich. But we all know some of these supposedly demonic figures, and they do not fit the description. One of the most delightful characters I have known is an employee-benefits consultant, who – though of generally high moral and ethical character – would probably amiably offer one of the engineered solutions referred to by Schultz to a corporate client, because that is his job.

To return for a moment to my opening anecdote: We are all potentially – or actually – participants in such heists, major or minor. Every time we lower our taxes based on a fine point of the Internal Revenue code brought to our attention by an alert accountant, we are taking money from another taxpayer who doesn’t know about the loophole.

There is a well known joke sometimes attributed to George Bernard Shaw and sometimes to Winston Churchill. The following is the Churchill version:

At a dinner party Churchill says to his dinner companion, "Madam, would you sleep with me for five million pounds?"

The woman responds, "My goodness, Mr. Churchill. I suppose I would."

Churchill replies, "Would you sleep with me for five pounds?"

She answers, "Mr. Churchill, what kind of woman do you think I am?"

Churchill answers, "Madam, we've already established that. Now we are haggling about the price."

What I did when I gleefully took my tax deduction was no different from what corporate executives and benefits consultants do when they find legal loopholes allowing them to shore up corporate profits, their fees and their compensation packages, by gerrymandering tax deductions and corporate earnings through monkeying with the retirement plans. True, I wasn’t in a position to lobby Congress for legislation to give me my loophole, but otherwise the only difference was in the scale.

Then what do we do about the abuses?

Given how easily – and how innocently – any of us can become the perpetrator of evil deeds like the ones Ellen Schultz reveals, especially when it is our job, what can be done about the unfair torrential flow of money from the masses of the middle class to the minuscule upper echelons?

Perhaps it is fair, in the sense that the shift in production away from legions of manual and semiskilled laborers in the most highly-developed countries to the use of mechanization and globalized labor has reduced the value to the economy of the middle classes and raised the value of the managerial class. This is a possibility. It would explain – and in a certain sense justify – the relative reduction in the flow of compensation to the middle class.

But if it is only because the managerial class has better access to the tools of obfuscation, artfully crafted deceitful propaganda, and procedural bullying, then it does not accord with our ideals of fairness. If that is the case then we must remedy the injustice. Mere legislation and regulation will not do it by itself, because we’ve seen how high-paid lawyers, consultants and managers can find ways around the letter of the law – and they do not feel bound to adhere to the spirit of the law.

As it has been in the remedying of past injustices, such as racial discrimination, the principal tool that is needed is shame. That is why the Occupy Wall Street phenomenon – even if its understanding of events and underlying causes is hazy and its goals are unclear – is lauded by many who believe a change in corporate practices is necessary. In the past, public shame for a shameful practice, like racial discrimination, blatant industrial pollution, and sales of cancer-causing tobacco products, has gone hand-in-hand with legislation against the practice – but the legislation alone is not enough.

Shaming those who heist pensions is more difficult, because it is harder to distinguish the bad practices from the good. All financial engineering may wind up being shamed, though some of it is benign and some is useful. Occupy Wall Street, if it is to be the vehicle, will need expert advice.

Michael Edesess is an accomplished mathematician and economist with experience in the investment, energy, environment and sustainable development fields. He is a Visiting Fellow at the Hong Kong Advanced Institute for Cross-Disciplinary Studies, as well as a partner and chief investment officer of Denver-based Fair Advisors. In 2007, he authored a book about the investment services industry titled The Big Investment Lie, published by Berrett-Koehler.