EMPLOYEE BENEFIT FUNDS - PART IV - RJR’S PROFIT SHARING PLAN THAT WENT AWRY

In 1955, R. J. Reynolds Tobacco created an employee profit sharing plan.  Based on a profitability formula, a portion of the company’s profit was annually deposited into an account for each eligible employee.[1] The contribution was about 13% of base pay each year.  The employees made no contribution; 100% came from RJR.  One third of the money was invested in RJR stock, and two thirds in a diversified portfolio. An employee was allowed to access the funds at retirement.[2] The plan’s purpose was to encourage workers to find ways to cut costs.

RJR stock rose 480% from 1955 to 1961, an era when tobacco was considered a “growth industry.” The fund returns continued strong through the 1960s.  Employees had every reason to be pleased with their growing wealth.

Then, the stock market declined sharply in 1969-70. When they got their account statement, many employees felt that “The company has lost my money,” ignoring the fact that they had never invested any money, but employees still saw it as their loss.  Given such dissatisfaction, the company discontinued the plan.  To compensate, everyone got a one-time 13% percent raise.

However, each employee had to decide - either take the money from the plan now or leave it until he retired. Most employees withdrew their money and promptly spent it.   The day the money was distributed, Cadillac sales were rumored to set a record in Winston-Salem.

Even after fifty years in the investment business, it still amazes me how people think short-term, with no regard for long term consequences.  The history of the RJR Profit Sharing Plan highlights the mistake of those without a sound investment strategy who reacted hastily and foolishly.

After recovering somewhat in 1971-72, the stock market suffered a bad decline in 1973-74.  Those who had taken their money said, “I told you so.”  But the longer story had a very different ending.

An old friend who left her money in the plan wrote me this note. “The company gave us the option of taking the profit-sharing plan money. The PSP terminated during the Ross Johnson era. I had a great surprise when I received my statement - my $3,000 in the plan in 1970 had grown to $78,000 in 1989.” This was an 18.7% annual return for the 19 years. If the balance had been rolled into an IRA when the PSP terminated, it could have easily grown to $371,000 in 2021, based on the strong PSP results and then a conservative return of 5% each year.

This is a return of 9.9% annually for 51 years. In contrast, a Cadillac Coupe de Ville sold for $6,000 in 1970.  Now, that car, in perfect condition, would bring $55,000, a 4.4% return at best. Realistically, all those 1970 Cadillacs in Winston-Salem have rusted away in junk yards. 

[1] Any regular (full time) employee with over three years of service.

[2] For some strange reason, an employee could receive the vested portion of his account if he were fired.  This created situations where workers occasional did something on the job that was a firing offense, just to get the money.