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Promises Broken

Greg Spears, 12:05 pm ET

VANGUARD GROUP is renowned for its rock-bottom investment costs, including announcing last week that it was lowering expenses on its target-date retirement funds. As a former Vanguard employee, I just learned how the company is, in part, paying for such cuts. Yesterday, Vanguard emailed retired “crew members” like me to say it was shutting down its retiree medical account program.

When my old newspaper company’s pension plan collapsed last year—it was underfunded by $1 billion—my payments were picked up by the federal Pension Benefit Guaranty Corp. I filed a few forms, waited a few weeks, and never missed a single cent.

But the money promised by Vanguard to its retirees comes with no guarantees, as I discovered yesterday. For each year after age 40 that you worked at the Malvern, Pennsylvania, fund manager, you got a $5,500 credit. There was 50% more added to a spousal account if you were married. After you retired, all that loot could be used to reimburse 75% of your health insurance premiums. To qualify, you had to work at Vanguard for at least 10 years and be age 50 or older, with your years of service and age adding up to at least 65.

Often, when a benefit is cut, the pain is phased in. Those hired after, say, 2021 might lose the chance to qualify. Not this time. Every qualifying retiree lost their account entirely. Their spouses, too, including widows and widowers.

Vanguard said it will make a one-time payment of $40,000 next year to assist with the change. That might sound generous. But if you worked there a long time, as I did, you lost a six-figure sum, at least on paper.

My old newspaper company’s pension plan was regulated by the Employee Retirement Income Security Act of 1974. That law guarantees workers’ benefits will be paid. Vanguard doesn’t offer a guaranteed pension, or at least not to rank-and-file employees. But its retiree medical account seemed solid. Until it wasn’t. In the end, it was just a promise.

I don’t want to say that Vanguard founder Jack Bogle would be spinning in his grave, because that’s such an overused cliché. I imagine, however, that he would have a few choice words to say if he were still here with us today.

I think Vanguard is a great place to invest, and I’m glad that I worked there. It felt good knowing we gave the average guy the best investments at the lowest cost. It was such a great business model that Vanguard was, on average, taking in $1 billion a day in new assets during the last two years I worked there. But being the lowest-cost provider is hard. You have to earn it every day. By cutting costs relentlessly.

Which reminds me of a story about life at ever-thrifty Vanguard. I got a call at my desk one day from a man who ran one of the country’s biggest 401(k) plans. The plan was replacing the provider of some of its index funds, he said, and bringing $7 billion to Vanguard.

Slightly shocked, I emailed the good news to my boss. I suggested we celebrate by having lunch at a nice restaurant.

He replied with two words: “You paying?”

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Doug K
Doug K
9 days ago

The lesson yet again is that private healthcare and pensions cannot work. There isn’t any company big enough and stable enough to guarantee pensions and healthcare. It has to be done by government. Greg was lucky enough to have the taxpayer cover his pension payments, because private business couldn’t make the payments. Never could, except for a short happy period in the 20th century.

John McHugh
John McHugh
11 days ago

So much for all of “ESG” blather from VG.

Loudly announcing the firm has adopted a “politically correct” hard-left public policy stance apparently does not ensure it plays straight with its own employees.

I’m gradually moving assets out of VG and into a shop that’s mostly avoided political theater.

evan rayers
evan rayers
12 days ago

As mentioned above: I’d welcome an additional report on the follow up by Vanguard, as I too am a bit confused.

Jonathan Clements
Admin
Jonathan Clements
12 days ago
Reply to  evan rayers

Greg is keeping tabs on what’s happening and will provide an update when things are clearer.

Jackie
Jackie
14 days ago

My former company did something even more devious – they promised retiree’s could sign up for the “same” plan as the employees, but the retiree would pay for a certain percentage of the premium. It looked good in the brochure. But after you retired (via mass layoff) it wasn’t so good. It turns out it was the “same” plan, but in a separate risk pool. The retiree plan had a risk pool all its own. With an average age of greater than 60 years old, the cost was extremely high. Once, you declined the insurance, you could never sign up again.

They still advertise to prospective new employees that they offer retiree health insurance. But it’s insurance no one with any alternative would want. Its a complete lie.

booch221
booch221
15 days ago

Everytime I log into my Vanguard account I get a nag screen trying to get me to sign up for their Personal Advisor Service at a cost of 0.3% per year on top of the fund expenses. This would cost me an additional $6000/year to do rebalancing and provide hand holding during periods of market. I have a relatively simple portfolio of stock and bond index funds so I don’t need this. Maybe they should stop cutting fund fees and cover their expenses that way.

Harold Tynes
Harold Tynes
15 days ago

Sounds like Vanguard may have gotten ahead of itself. After the lawyers and PR dept get through with this change, it may look different. For the rest of us, we are on our own. For all of the good advice available on this website, there is very little on buying post retirement healthcare.

Rick Connor
Rick Connor
15 days ago

The company I retired from has a retiree medical plan associated with the pension plan – you can purchase into the company’s medical plan at full price. The company then provides a subsidy of up to 50%, depending on your years of service. This is only for the pre-65 period before you are medicare eligible. In 2014 they effectively froze the DB pension plan, choosing to enhance the 401k plan. I worried for the past decade that they would cancel the medical plan. My wife and I just signed up. We are hoping it lasts at least another 18 months.

S Wedekind
S Wedekind
16 days ago

…$40,000… and you’re complaining? Our (at one time was a fortune 500) company abruptly cut any/all forms of health insurance support for its retired employees.

R Quinn
R Quinn
16 days ago

Welcome to the club. Last January my former employer terminate retiree medical plans and replaced them with an HRA contribution. Initially that was fine except the annual contribution increase only 1,5% while premiums increase more. In addition a company Rx plan is gone in lieu of us buying a Part D and for many much higher OOP costs.

The irony is I designed and managed and negotiated those plans and over the years stood before thousand of workers telling them the percentage of premium they would pay in retirement would not change after they retired which is no longer true. .

The change was designed to lower FASB costs, but the reality is back in 1995 I changed the plans for people hired after that year and there were no retiree medical benefits accruing going forward. In other words there was no reason to make the change as the liability was disappearing.

Why then do companies do such things. Well, people change, new hires have no historical perspective nor do they care. They see an opportunity to make a name, they call in a consultant and convince management “everyone else is doing it”

Don’t count on promises even if you gave up things in labor negotiations to get them. Legal yes, integrity, not so much.

Mark Eckman
Mark Eckman
15 days ago
Reply to  R Quinn

I disagree on the why. While I spent much of my career freezing pensions & cutting retiree medical plans in the name of profitability, it was not always a fun career. One union said my credentials stood for Cheapest Person Around. I changed employers, twice when profits became more important than people.

I believe the why is rooted in stock based compensation that became more common starting in the 1990s. Senior executives, especially CEOs, are extremely competitive with their peers and paid primarily by the change in pricing of the company stock. The more costs are cut, the higher the stock price. While that competition is great for shareholders, it becomes toxic for employees, especially long term employees. Freezing or cutting benefits is just a symptom of this race for excess.

kristinehayes2014
kristinehayes2014
16 days ago

I also have a very generous retiree health benefit from my employer. It will, in essence, help pay for health care for myself and my husband for the rest of our lives. I have, of course, wondered if I will actually benefit from it. The benefit was eliminated, I believe, back in the early 2000’s. Since I started working there in 1998, I’m still eligible to receive it. I hope that the elimination of the benefit for new employees will mean it’s still there for me, but as your story illustrates, there’s no guarantee. Good luck and let us know how it goes in the future.

R Quinn
R Quinn
16 days ago

Your program is indeed generous, but as you say, no guarantee, make sure you have a backup plan.

Greg Spears
Greg Spears
16 days ago

UPDATE

Vanguard HR apologized and said changes are coming in a recorded message on Tuesday.

“We sincerely apologize for the abrupt timing” of the benefit termination, it began. While there is a “need to make changes,” Vanguard is “taking a step back to recalibrate our approach.” The benefit is extended through 2022 while alternative approaches will be developed for retirees and crew.

Stay tuned…

Greg Spears
Greg Spears
16 days ago

At hiring, Vanguard promised a retirement benefit of $5,500 a year for each year of service in a fund that could be used to offset the cost of medical insurance premiums in retirement. My spouse would receive $2,750 for each year of my service as well.

From their actions, I believe Vanguard is legally obligated to give me nothing.

My wife and I are 65.

medhat
medhat
16 days ago
Reply to  Greg Spears

I’d welcome a report on the follow up by Vanguard, as I’m a bit confused. Sounds like this was more of a non-binding “promissory note” versus the actual exchange of money from Vanguard to you, which is why I guess they could then change the terms, maybe akin to an HSA Vanguard holds but for which you are the beneficiary. In either case, sounds like suboptimal communications, which again, seems odd coming from a firm like Vanguard.

Jon Jewett
Jon Jewett
16 days ago

What exactly did Vanguard promise you when you were hired?

Vanguard is giving you $40,000. How much is Vanguard legally obligated to give you?

How old are you?

Are you on Medicare? If so, how much will it cost you annually to buy a supplemental policy to replace your Vanguard coverage?

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