Host, Traci Dority-Shanklin, recaps her 2021 discussions about pension reform and hybrid retirement solutions for failing multiemployer plans. With the help of several guests from previous podcasts, Traci highlights potential solutions and recounts events that drove these plans to the breaking point. Past guests include AFL-CIO president, Liz Shuler; UFCW Local 21 president, Faye Guenther; Executive Director of NIRS, Dan Doonan; Executive Director of NCCMP, Michael Scott; labor organizer and co-founder of Unionbase, Larry Williams Jr; and consulting actuary from Cheiron and co-author of The Hybrid Handbook, Elizabeth Wiley.
Some highlights from the 2021 Hybrid Retirement Recap Show:
03:35 – A Generational Cynicism about Retirement Plans
09:59 – Drawbacks of a Defined Contribution Plan
13:04 – Building the Right Hybrid Plan
16:08 – The Hybrid Plan Case Studies
22:59 – Future Retirement Security for All Americans
Traci Shanklin 0:02
This is The World of Multiemployer Benefit Funds with Traci Dority-Shanklin. We believe in demystifying retirement solutions, upholding retiree dignity, and contributing to economic stability through union organizing, pension reform, and legislative activism. In short, we're devoted to busting myths about the labor movement. If you're interested in the enduring power of labor, well, you've landed in the right place. Experts and activists will share their insights, expertise, and stories. Time is short, so let's get started.
Traci Shanklin 0:37
In 2021, many of our conversations revolved around multiemployer pension reform and a potential pension crisis in America. While the American Rescue Plan President Biden signed into law on March 11, 2021, gave hope to some of the most distressed multiemployer pension plans, there is still a need for reform. However, given the state of politics today, multiemployer pension fund reform is not eminently likely. Conversations on The World of Multiemployer Benefit Funds increasingly turned to hybrid plan discussions. Hybrid plans are an option to a traditional defined benefit or defined contribution plan. But, the term, hybrid, really is an umbrella term that includes various retirement plan structures. Today's episode is highlights from these conversations.
Traci Shanklin 1:29
Once upon a time, you could work 25 or 30 years for one employer and in one industry, and count on being rewarded for your hard work and loyalty, with a steady stream of pension checks lasting the duration of your retirement. These benefits came courtesy of your defined benefit plan or DB plan. Elizabeth Wiley, a consulting actuary at Cheiron, and co-author of the Hybrid Handbook, a white paper about hybrid retirement plans in the public sector, came on the podcast and gave a great high-level definition of the defined benefit or DB plan.
Elizabeth Wiley 2:07
And I'd say a defined benefit fund is one where the provisions of the plan define what the benefit received in retirement will be. For example, it gives $1 amount per year of service earned or a percentage of salary that will be received in retirement. And then these benefits are paid over the members' lifetime as an annuity. So, as such, the two key characteristics that I would highlight about a defined benefit plan are that the amount of the benefit payments received in retirement are what is defined and that the retirement benefits are typically received over a member’s lifetime in retirement.
Traci Shanklin 2:44
Historically, labor unions and union employers have relied on defined benefit pension plans as the fundamental component for attracting and retaining employees. AFL-CIO's president, Liz Shuler, echoed this sentiment when she visited the podcast.
Liz Shuler 3:00
If you're in a union, you're far more likely to have access to retirement benefits at work. I think it's 94% of union members have a retirement plan at work compared with just two-thirds of non-union workers. Union members are more likely to have that guaranteed defined benefit pension plan that provides a lifetime income in retirement pensions were the cornerstone at one time when you went to work and you aspired to have a defined benefit plan that you could pay into and have that security long term.
Traci Shanklin 3:35
Despite the latest Gallup poll showing high support for labor unions among millennials and Gen Z, there's a generational cynicism that retirement plans are not an option. Echoing this sentiment during his visit to the podcast is Larry Williams, Jr. Larry is a millennial labor organizer and former co-founder of the PWU, the Progressive Workers Union. The PWU is a union that represents nonprofit workers at the Sierra Club.
Larry Williams, Jr. 4:04
There's things that come with the traditional investment scope, that are of interest to folks my age. A lot of folks come in saying, "Oh, I know I can't get a pension but can at least get a 401k." So, they tend to underestimate what they can get. And that's a problem because a lot of employers, even progressive employers have completely taken away the pension, and so you come in with the lower expectation of what you can get. If you think that we could reverse that trend. I think that that's brilliant. And I do think that folks will fight for it if they thought it was possible. I've always thought that we couldn't negotiate for them, especially since corporations are having record profit. But I haven't really heard many folks say that or even identify that. I've heard folks say, "Well, that's gone, but maybe we can improve our 401k."
Traci Shanklin 4:46
Sadly, millennials and Zoomers may not be entirely wrong. issues have emerged and challenge the sustainability of these multiemployer-defined benefit plans. People are living longer and fewer employees are entering these plans. My next guest, Dan Doonan, the executive director from the National Institute on Retirement Security, or NIRS, who co-authored the Hybrid Handbook with Elizabeth Wiley, a consulting actuary at Cheiron, pointed this out on the podcast.
Dan Doonan 5:17
We also had defined contribution plans with annuitization. This would be like a 401k. But at retirement, you can get an annuity with the money. So, you have that life income, you still are able to risk pool at retirement for longevity risks, because an individual may retire and maybe six years and they may have 36. So, that's really difficult for individuals without risk pooling to manage. When you're a multiemployer system, I think there's a need to have employers comfortable with the system they're in, you don't want employers to leave you'd like new employers to come in over time. And I think having a chance to show that this system won't have costs that are as volatile is something that you can use to sort of keep the plan demographics healthy over time. We've seen there's a real connection with some of the plans that are troubled, being more likely to have unhealthy demographics where there's a lot of retirees and very few workers. So, in terms of the trade-off workers get with some risk-sharing, I think there's an effort there again, to attract employers and keep the plan healthy and ongoing.
Traci Shanklin 6:32
Other issues challenging multiemployer-defined benefit plans are poorly designed tax rules and regulations. As my guest, Michael Scott, the Executive Director of the National Coordinating Committee for Multiemployer Plans, mentioned on the podcast.
Michael Scott 6:48
We're in a heavily regulated environment, most of the plans whether your pension, health and welfare, and apprenticeship training program are subject to ERISA. So, there's a heavy federal involvement, and over the years, the pension side has become a much bigger issue. And it's partially because the federal government set the rules under which our pension plans operate. And they made a number of decisions that are counterproductive to the well-functioning of a pension plan. And just to give you one example is there is an excise tax on well-funded pension plans. It applied to both single-employer and multiemployer, but in the single-employer world, it didn't make any difference, because if you became well-funded, in a single-employer plan, the employer could skip a year of contributions to not trigger the excise tax. In the multiemployer space, you couldn't do that, because those contributions are collectively bargained. They have to be made based on -- generally based on hours worked. So, it left multiemployer plans with the problem of if you're too well-funded, you're going to trigger a 40% excise tax. And the only way to get around that is to increase your liabilities.
Michael Scott 8:08
But there's another provision in ERISA, the anti-cutback rule, which means that once you earn a benefit, you can't cut it back. So, in good times, you're increasing your liabilities to make sure you don't trigger the excise tax. In bad times, you can't take it back, so it's counterproductive. And there's other things over the years. Deregulation of the trucking industry is one example. Trade policies that encourage manufacturing to move overseas which ultimately or out of the country that ultimately resulted in less unionized employment. A lot of those rules or policies were just problematic for us.
Traci Shanklin 8:46
Market volatility has also contributed irreparable damage to many of these retirement plans as my guest, Fay Guenther, the president of the UFCW Local 21, shared about their DB plan.
Faye Guenther 8:59
You talked about the 2001 dotcom crash and 2008 crash. Our pension plan, the Sound Retirement plan has been in the red zone since 2010. And, you know, we were forced into cuts by the federal law. There was elimination of benefits that workers really benefited from at the same time, we were also negotiating increased contributions from the employer. We were making scheduled progress, but we were going to be a red zone plan for far too long, and it was just too far away for workers to see any benefit improvements, and all they were subjected to were benefit cuts. And one of the earlier on things before the market crash when the pension plans were seeing big increases, one of the things that was happening was there were permanent benefit improvements being made with no anticipation that someday there could be a rainy day and no money being set aside for permanent benefit improvements. And so, then when there was a rainy day, there was these pretty deep cuts that had to be made.
Traci Shanklin 9:59
Some trades are now offering both a defined benefit and a defined contribution plan. However, DC plans are not the standard in the multiemployer world and are more akin to a 401k plan touted by many businesses and corporations, Elizabeth Wiley gave a high-level definition of a defined contribution or DC plan.
Elizabeth Wiley 10:23
In a defined contribution plan, that's where the provisions of the plan define the contributions or the amount of money that are going to be played -- paid into an individual's account while they're working. And this is similar to a 401k style plan that many people are familiar with. So, in these plans, typically the funds are kept in individual accounts that the members manage the investment of, and then they receive that individual account that retirement as a lump sum. So, I would say the key characteristics of defined contribution are there's individual accounts, individual management of investment, and you receive your retirement benefits as a lump sum instead of spread over your lifetime.
Traci Shanklin 11:05
A big concern with DC plans and 401k plans is that they require participants to be actively engaged and be educated about their investment choices as Dan Doonan explained.
Dan Doonan 11:18
In the Secure Act, they're making efforts to what I would say make their products a little bit more like pension systems. And I think there's a recognition of some of the things that work really well in pension systems. And DC plan providers are thinking more in terms of automatic enrollment, right, when you're hired into a pension, you're just participating there. There's no decisions; there's no sort of behavioral hurdles that you have to cross to sort of participate. They're also working to be able to offer lifetime income products within DC plans. Right now, if you go to buy an annuity on your own, the insurance company's likely going to say, "Well, they're probably healthy; they're probably going to live for a long time." You have to go price it out, go through the details, but you may not pick the best deal. If you institutionalize that and put that in a defined contribution plan. Now, you have a fiduciary, someone's fiduciary responsibility, who's going through and trying to find the best deal, and you're purchasing on a group basis instead of an individual basis.
Traci Shanklin 12:24
Unfortunately, this can be a steep learning curve for the average worker, and that can come with a cost.
Dan Doonan 12:31
Florida's FRS system, where you can choose a DB/DC combination, or you can choose DC only. A couple years ago, they changed the default, so if you don't turn in your paperwork, you go DC only. And you're now in a self-saving plan. And given the administrative processes, half of the new workers are defaulting into a DC only. That's not a solution in my mind. You know, that's a process that isn't working well, and people aren't making an affirmative decision, and they're losing their pension over it.
Traci Shanklin 13:04
Hybrid plans are becoming an option to the traditional defined benefit or defined contribution plan. The term, hybrid, is an umbrella term that includes various retirement structures.
Elizabeth Wiley 13:16
As the simplest definition that I'm going to offer is it is any plan that is neither a traditional defined benefit nor a traditional defined contribution plan. And the initial hybrids were actually called hybrids because that's what they were. They were a hybrid of defined benefit and defined contribution plans. They were plans that feature elements of both of these two more traditional goalposts. So, for example, as a real simple hybrid would be a DC plan, you know, where you've got those individual accounts, but where you can annuitize that balance at retirement. So, instead of receiving a lump sum, you get a monthly payment, as long as you're alive.
Traci Shanklin 13:55
All retirement plans are unique, and many variables contribute to build a hybrid retirement plan structure. However, there are ways to combine the positive elements of both defined benefit plans with defined contribution plans to give a more sustainable retirement.
Dan Doonan 14:11
And then we talk about three different ways of combining defined benefit and defined contribution. There's horizontal hybrid, that all of your pay is in both the DC and the DB. And typically, this looks like a DB that's sort of watered down and the benefits are reduced. But you get a DC in addition or 401k type plan. In addition, we also have a few examples of vertical hybrids out there, where you're in the DB up to a certain amount of pay. And then anything over that is in the DC system. And this does a better job protecting lower-paid workers because they tend to be all in the DB. And then finally, there are choice systems, too, where when you're hired, you're forced to choose either I want this pension with this amount of contributions, or a defined contribution, and those choices of different in different places. And then finally, we have really more traditional pension systems that share risks in some way. It's very common in the public sector for employees to pay a portion of their salary for their pension. So, we have cost-sharing in some plans, as well as benefits that are contingent on certain triggers that might impact accruals or the cost of living increase.
Elizabeth Wiley 15:30
Well, we've kind of defined these categories so I'll talk about it, it's important to realize that you can take elements of these and combine them. So, for example, those risk-sharing provisions that you're talking about, those can be added onto a traditional DB plan, or they can be used with a plan that's also a hybrid in that you've got a defined benefit and a defined contribution, whether it's vertical, horizontal, or choice. So, there is some blurring of these lines. But, I think thinking about them this way can be real helpful for working through the process, and that intentionality that was spoke to.
Traci Shanklin 16:08
Hybrid retirement structures have been around for decades, and their greater adoption could be a viable solution for saving multiemployer plans. Dan Doonan and Elizabeth Wiley co-authored the Hybrid Handbook highlighted their favorite hybrid success stories of public sector funds in Wisconsin and in South Dakota.
Dan Doonan 16:29
Most of the conversations on risk-sharing started around Wisconsin and South Dakota. They've been doing this for a while. They both have a process that they go through regarding what happens if certain thresholds are crossed. And, you know, it's very process-oriented. For example, in Wisconsin, you have risk sharing, through post-retirement benefits called benefits are adjusted. Clearly, that's a give on the benefits side. But, the flip side of that is when Scott Walker was there, and he was going after public-sector unions, there were proposals to shut down WRS and start a defined contribution. They didn't go anywhere because the system was funded, very robust, nearly 100% funded. All the local governments participating were happy with the benefits and happy with the costs, which had been stable.
Elizabeth Wiley 17:21
And on the South Dakota, they're also one of my personal favorites to point at as kind of a blue-ribbon example, and it's again about the process that they follow rather than the actual answers. But, one aspect of that, that I just want to highlight given the previous conversation about communication, is they do a really good job of giving projections and forecasts and they go out for each of the next three years and look at based on what the investment returns are. What can the COLAs be for those years was just one of their risk-sharing provisions, so that all the involved parties, whether it's the members, the employers, have an idea of the range of likely outcomes for those upcoming years. And it really seems that that communication has helped this to be more popular and successful.
Traci Shanklin 18:17
I also featured the UFCW Local 21 and the story of their transition from a legacy DB plan to a variable annuity DB pension plan, also known as a VAPP. UFCW Local 21 president, Faye Guenther, shared their deeply personal story.
Faye Guenther 18:35
Our intention will be in the future to continue to bargain improvements. But, when you're in a red zone plan, you can never bargain improvements. It's actually against the law. You can't improve benefits during a red-zone plan because you're -- you're not allowed to do that. And so, for us this variable annuity-defined benefit plan, there's two chances. Well, let me back up for a second. When we negotiated this, our plan was 70 something percent funded and it was not increasing. It was going in the wrong direction. We had to stop the bleeding. And what we were able to do is first negotiate with Kroger that they would take all of their unfunded liability, half service unfunded liability. So, it was $582 million of liabilities and then take out under 65 million of assets that all got moved to the Consolidated Fund. As soon as that unfunded liability got pulled out of the Sound Retirement Trust, it almost immediately put the plan in the green zone, which we have not seen since 2010.
Traci Shanklin 19:33
Michael Scott spoke about the progress and hope given to distressed multiemployer-defined benefit plans when Congress passed the American Rescue Plan Act or ARPA. ARPA provides $90 billion in relief for 200 critical and declining DB plans that affect millions of retirees and participants.
Michael Scott 19:54
What the American Rescue Plan was really about doing was making sure that plans had enough money to pay benefits through plan year 2051 without reduction and giving them that money on -- in a lump sum. Generally, it's going to be between now and 2026.
Traci Shanklin 20:14
However, we need robust and comprehensive multiemployer pension fund reform legislation. And ARPA only provides pension relief. It doesn't fix the problem because it is an actual reform. Given the state of politics today, multiemployer pension fund reform is not imminently likely. Let me be clear, I am in no way shape, or form advocating for trustees or unions to do away with their perfectly healthy DB plans and replace it with a hybrid plan. In fact, I echo the very same sentiment Liz Shuler expressed about defined benefit plans when she was on the podcast.
Liz Shuler 20:52
We don't think the answer is to get rid of defined benefit plans. We have to look at the bigger picture. We are living in a broken economic system, where the inequality rates are skyrocketing, and are leaving millions of people behind. And we have reckless Wall Street behavior. We have deregulation, employers are misusing corporate bankruptcy codes. And that's threatening the financial security of so many people who have worked hard their entire lives, for secure retirement only to have that promise robbed from them. So, we have to protect the freedom of workers to come together in a union, fight for these defined benefit pension plans, and actually expand access to them for more people and think of creative ways to bring that benefit to more people. And I think that's the responsibility we have in the labor movement.
Traci Shanklin 21:58
But, if your plan is in distress, and it's facing critical and declining status, and the future seems hopeless, then maybe -- just maybe a hybrid retirement fund could be the bold solution that you are looking for.
Faye Guenther 22:12
It took a lot of talking with our own team, our own bargaining teams, our members about what a long-term solution to the pension was gonna look like because it's not a long-term solution to forestall insolvency, and then go bankrupt, and then go to the PBGC. And maybe get hardly anything for on the percentage, you know, you don't get your full amount. And the PBGC is projected to go insolvent at some point, too, so that it's just not a good solution to let your plan cycle. It's like a death spiral. So, we really did not want to be involved in the death spiral anymore. And so, for a while, we've been talking about what could an alternative solution look like? And how can we build unity amongst the members amongst the employers and move something?
Traci Shanklin 22:59
Future retirement security for all Americans is critical and could help us avoid a coming retirement economic catastrophe. Worker shortages may force employers to be more creative in retirement solutions. Multiemployer plans can work together with stakeholders to save or transition these plans. Unions and union employers can help educate the up-and-coming generation on the availability of retirement options, organize a new generation of union members, and maintain their legacy of improving and raising the bar for all workers, including non-union workers.
Larry Williams, Jr. 23:35
I think that there's a space for us to redefine what union membership looks like to fit more of what those workers want. I think they don't come in and say, "Is it a choice between me getting paid more and getting a union?" They come in and say, "How much are my dues?" They don't necessarily understand that your pay increases over the time period of the contract will basically make the dues not really matter. I think that they know some things, but some things are unclear. And we kind of need to come up with more consistent messaging. I know everything's different contract-to-contract, employer-to-employer, but there needs to be shared terms, at least in some way.
Faye Guenther 24:11
We're lucky we have retiree classes, where we teach people about how to combine social security with their pension with their savings, but we still have a lot of work to do. Our Sound Retirement Trust only covers a portion of our membership. There's still a whole other part of our membership that's maybe only got 401k Or maybe they have a defined benefit plan that's been grandfathered or, or those sorts of things. So, financial literacy, financial education, and having people imagine what it's like if they don't already know somebody who's retired -- their bodies are tired and they don't have enough money to keep the heat on. Or, or you know, those sorts of things. I think helping people see a future and see what a positive future can look like and what not a positive future can look like is our job as organizers and movement builders and it's the union's job to educate people about this.
Liz Shuler 25:05
Young people are balancing so much right now. A lot of them have student debt, stagnant wages, they don't even realize a pension plan could be an option for them because of all that they're balancing and just trying to get by and trying to make it in the economy. Those who are outside unions, of course, don't have the good-paying jobs. So, often they're working more than one job. When they do join the labor movement, there's this "A-ha" moment, where they find out that belonging to a union means so much more than just wages. They find out that they get great benefits; they find out, "Oh, there's this thing called a defined benefit pension plan," but only until they're in our ranks do they start to get it.
Traci Shanklin 25:56
We are in a moment called the Great Resignation. With the COVID-19 pandemic, worker shortages, and rising unemployment, employers must get more creative to attract and retain employees. As COVID stimulus checks came to an end, pundits predicted that people will go back to work. However, this has not been the case. There are 10 million jobs to fill, yet people are quitting their jobs in record numbers. Organized labor has an opportunity to educate and promote the value of working for union companies, better wages, more substantial workplace safety practices, and future financial stability through pension plans. Perhaps, this is the perfect storm for labor to energize a movement towards a revised defined benefit retirement scheme.
Traci Shanklin 26:44
Thanks for joining the conversation where listeners connect with leading experts throughout the financial and investment world. Please consider supporting us by clicking the donation button on our website at www.multiemployerfunds.com. Again, that's www.multiemployerfunds.com, and hit the donation button. Be part of the change. See you in 2022. I'm Traci Dority-Shanklin.
Traci Shanklin 27:15
And that's it for this week's episode of The World of Multiemployer Benefit Funds. We'd love to have your support. You can show your support by sharing episodes, making comments, or heading over to www.patreon.com/multiemployerfunds for other partnership opportunities. Thank you for joining us, and we look forward to the next time.
Sisu Partners, LLC host The World of Multiemployer Benefit Funds podcast which contains content and discussions that are prepared for informational and educational purposes only. No listeners should assume that any discussion on this podcast serves as the receipt of, or substitute for, personalized advice from an investment professional as the information provided on the podcast is not intended to be investment, legal, or tax advice. The Company is not an SEC-registered investment advisor and does not solicit clients or raise capital for money managers. Sisu Partners offer securities through XT Capital Partners, LLC