Union-Sponsored Retirement Plans Provide Challenge, Opportunity for Advisors
Defined benefit pension plans are in a tough spot in today’s benefits environment. Many corporate employers are transitioning away from pensions and toward 401(k) or other employee-directed savings and benefits options. But for union-sponsored defined benefit plans it’s not that simple.
Advisors hoping to find success in the union-sponsored DB space must understand the different ways unions’ benefits are funded, as well as the complex nature of the union benefits landscape, in order to find the balance that’s right for each individual plan.
“It’s no secret that Defined Benefit plans of all stripes are under pressure,” said Daniel Krause, business development consultant with the Taft-Hartley team at MassMutual and a veteran of the union world. “But while many corporate employers are looking for the right opportunity to freeze or eliminate their DB plans, union-sponsored DB plans are protected by the fact that both labor and management must agree on any changes.”
Since unions generally view DB plans as a core element of the benefits package they offer to their members, any decisions about altering them are made with great care. As a result, changes with respect to union-sponsored DB plans take place at a more deliberate pace than their counterparts in the corporate world.
Union workers tend to receive higher wages and benefits compared to non-unionized workers in the same jobs.1 However, trustees of union-sponsored plans may need to consider tradeoffs between, for example, better health benefits today and reduced – or, in extreme cases, eliminated – retirement benefits down the road.
“Union plans tend to provide more benefits, but the downside is the uncertainty of whether the ultimate pension will be there when they’re ready to retire,” according to Willie Schuette, a financial advisor with the JL Smith Group.
That uncertainty has the potential to affect a lot of American workers: 52 percent of defined benefit plans for civilian workers in the United States are still open to new employees according to the Bureau of Labor Statistics,2 and the Department of Labor states that as of 2014 there were 44,869 active DB plans3 in the United States.
Union Benefits Funding: It’s Complicated
Pension and benefits funding for unions differ based on the type of union in question. Three general types prevail: the private single-employer union, the public union, and the multiemployer union.
Private single-employer unions will generally negotiate with their employer for the working conditions, pay and benefits (including pension). The employer’s ability to honor those agreements is based on their balance sheets, and the process stays internal to the employer and the unionized employees within it.
Public unions, which cover teachers, law enforcement and other service positions, depend on taxpayer dollars for their funding.
Multi-employer plans, the most complex type, are designed to provide benefits for unionized members who perform work in a given trade or industry and who often work for several different employers over the course of their careers. Because these workers are more affiliated with a trade than with any particular employer, their pension, pay and other benefits are negotiated through a collective bargaining agreement with all the employers that want to hire their skills.
Each affiliated employer is required by the collective bargaining agreement to pay benefit contributions into the trust funds of each of the negotiated benefits. These typically include trusts for Health and Welfare, Defined Benefit Pension (either local pension or a national pension) and Supplemental Defined Contribution Plans. These benefit trusts are overseen and managed by a board of trustees made up of an equal representation between labor (union leadership) and management (group of employer representatives).
Joe Carmignani, assistant vice-president of Taft-Hartley Client Management at MassMutual offers this example: take a local union of Operating Engineers who run heavy equipment on a job site. Each local union has a collective bargaining agreement with multiple employers. This agreement outlines the hourly contribution to each of the benefit programs that the employer must contribute to by employing the union member. So for every hour a member works, regardless of which employer they’re currently working for, contributions are made on their behalf to the various benefit funds negotiated by that member’s union.
“This multifaceted benefits process depends heavily on the work environment and membership’s ability to earn the contributions paid into the benefit funds on their behalf,” Carmignani said. “Because benefit plan funding levels and account balances depend primarily on the number of hours each union member works, employment levels are the most important driver to the health of the various benefit plans.”
Ability to work means avoiding injury and maintaining and refining one’s skills, but it also depends on economic conditions and the call for skilled labor. “If hours are down and work is slow, like with the recession in 2008 and 2009, it impacts how much union members are able to earn to put toward benefits like health and retirement,” Carmignani said.
For the defined contribution or 401(k) plan, lack of work has a direct correlation to the member’s retirement plan balance. The less the member works, the fewer contributions are made to their individual account balance, leaving a smaller balance available to them at retirement.
Designing pension, health and welfare funds is much more complicated in a multi-employer setting than it is for single-employer plans. To maintain adequate funding to deliver on their promises to the membership, union trusts need a healthy cash flow (new contributions) and asset appreciation to outpace the outflows from claims or retirement distribution benefits. They also need longevity and solvency with the employers that are signatory to the collective bargaining agreement to create jobs for the union membership.
The primary issue facing most multi-employer plans today is the declining percentage of active and contributing members in these benefit plans. It is not uncommon for half of the participant base of a Defined Benefit plan to be retirees already receiving benefits. Contributions for actively-working members are used to pay the retiree distributions, which takes away from the pool of assets available to sustain the plan for when these active members are ready and able to retire.
In the public sector, raising taxes might be a solution employed to raise funding levels based on union negotiations, while a private employer that cannot pay out pensions as planned may choose to go bankrupt, absolving itself of its obligations.
In the event of employer bankruptcy, many pension benefits are covered by the Pension Benefit Guaranty Corporation, which is funded not through tax revenue but “by premiums set by Congress and paid by sponsors of defined benefit plans, investment income,” and other sources.4
But the PBGC itself is in a tight spot: its 2016 annual report states funding deficits of $20.6 billion for single-employer plans and $58.8 billion for multiemployer plans.
Regarding the latter specifically, Thomas E. Perez, Chairman of the PBGC board, wrote in that report: “I remain concerned that the multiemployer plan program faces a growing deficit, [which] is at an all-time high and needs significant reform to remain viable.”5
401(k) and other employee-directed savings plans have become more prevalent in the corporate plan marketplace. These may be more attractive to today’s workforce for several reasons, among them that:
They put power in the employees’ hands by allowing them to save on their own as pensions become increasingly risky for employers to provide, while also providing cost certainty for the employer, and
They allow employees to “take the money with them”, whereas pensions tend to require that employees commit to their employer for a long period of time, potentially leaving employees who change jobs without adequate savings and their guaranteed monthly payments forfeit.6
So why don’t more unions move to the 401(k) defined contribution model? “A pension is a guarantee of future payout,” said Schuette, “so employers who have made that promise can’t just drop it.”
It’s worth noting that many union plans actually do have a defined contribution plan to supplement the pension they offer.
“The most common structure is the traditional defined benefit pension plan with a supplemental defined contribution plan that’s solely employer-funded based on the collective bargaining agreement,” according to MassMutual’s Taft-Hartley National Practice Leader Doug DeNigris. “And among those who offer a DC plan, about 40 percent also offer employees the ability to add their own money beyond the collective bargaining agreement.”
The 401(k) feature is not widely used, however; handling voluntary deferrals in a multiemployer plan is complicated, increasing the burden on the participating employers and requiring specialized expertise by the union Fund Office to successfully implement and manage.
Whether done through a fund office or third-party administrator, a multiemployer plan has to interface with several – sometimes hundreds – of payroll systems, which can makes tracking and collecting voluntary deferrals a challenging task. There are other considerations, too, according to Krause.
“In order to avoid IRS interest and penalties, most plans that have adopted a 401(k) feature require employers to make weekly contributions. Fund offices and TPAs have a great deal of expertise in handling the monthly contributions that are required under the collective bargaining agreement, but weekly voluntary contributions filtering to them from signatory employers requires the development of an infrastructure that’s somewhat different from what they have utilized in the past.”
Union Leaders: A Professional, Personal Stake in Benefits
Resistance to reduction of defined benefits including pensions goes beyond the nuts and bolts of making it work, though, especially in the complex multiemployer environment.
Benefits packages – a cornerstone of what unions promise to their members and a large part of what draws some workers to union jobs in the first place – are negotiated by union leaders on behalf of members.
Union leaders are elected and trusted to act in members’ best interests, so they naturally want to do right by their organization. No one in that position wants to explain why benefits were reduced under their watch, a fact that advisors entering this space for the first time should keep well in mind.
The Future of the Union Pension Plan
Defined benefits are still a power-player in the union world, but the fact remains that pensions can present a significant financial liability for employers. In this environment, it’s likely that trustees may start taking a closer look at ways to moderate that liability, including the possibility of incorporating a 401(k) feature into an existing defined contribution plan or by starting a defined contribution plan to help members offset any changes.
It’s a charged issue, though, of which employers, trustees, members and advisors in the union world are already well aware. Advisors looking to enter this space should tread carefully. If you believe you have an opportunity with a union-sponsored plan, consulting someone with Taft-Hartley experience may increase your likelihood of success in marketing to these plans. MassMutual advisors should contact Taft-Hartley National Practice Leader, Doug DeNigris.
The situation is complex, but there’s no better time to start talking with union clients or prospects about considering a new way of saving. Working with each union plan’s needs to find the balance between honoring pension agreements with their members and opening up alternate savings options may be the key to helping your plans’ participants have a better chance of achieving the retirement for which they work so hard.
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1 Bureau of Labor Statistics, “Differences between union and nonunion compensation, 2001-2011”, April 2013. http://www.bls.gov/opub/mlr/2013/04/art2full.pdf
2 Bureau of Labor Statistics, “Table 5: Defined benefit retirement plans: Open, soft and hard freeze plans, civilian workers”, March 2016
3 US Department of Labor, “Private Pension Plan Bulletin Historical Tables and Graphs 1975-2014”, September 2016.
4 PBGC, How PBGC Operates, http://www.pbgc.gov/about/how-pbgc-operates.html
5 Pension Benefit Guaranty Corporation, Annual Report 2016
6 US. News, “6 Reasons a 401(k) is Better Than a Pension”, May 2013.