Multi Employer Pensions part 1

*Note: This is part 1 of a mini series on multi employer pensions.*

If you have read any other posts on my website you have undoubtedly discovered I have retirement savings on my mind. I have spent quite a bit of time researching retirement options for Americans and I have come away with a greater appreciation for those who not only take retirement seriously but also those who take advantage of the retirement options they have. I have difficulty understanding why individuals who have a 401k (which I don’t) do not contribute at least until they get the match their company gives – it’s free money they leave on the table! I know of some people who do not save a dime for retirement on their own; I suppose they look at it as if it were someone else who was supposed to provide for them in their latter years. If those people have negotiated retirement funds then perhaps they can continue on in that way but I still maintain it is prudent to save some (as much as you can, really) on your own. After all, I have never met a person who said they were sorry they saved too much for retirement but I have met plenty of people who wish they had saved more.

I could ramble on but I want to get to the heart of this post: multi employer pensions. Let me start by breaking down pensions into bite size nuggets easier to understand and digest. Essentially, there are three different type of pensions and they are defined below:

Single Employer Pensions

Single employer pensions are pensions offered by single companies. Some examples would include Coca-Cola, ExxonMobil, and NextEra Energy and some of these companies have the best funded pensions in the country.

Government Pensions

Next are government pensions and they could include federal, state, and local. These pensions are funded through tax dollars and often are what most Americans know regarding pensions.

Multi Employer Pensions

The last are multi employer pensions, which is what I and many others I know have. These differ from the previous two in several ways. For starters, there is more than one major player in the game. With the single employer and government pension there is only the company and the government to deal with; not so with this fund. The number of contributors to this fund could me numerous – and some plans have a great deal of contributors. The idea is rather simple: the employee accrues pension contributions/credits despite having worked with several different companies throughout their lifetime. All contributions are made to a single plan for the individual. Another way to explain it is an individual has a pension and it transfers from company to company. I personally know guys who have worked for dozens of contractors over the course of their career and yet they have accrued pension credits from one pension plan.

* A caveat to note is the employers contributing to the multi employer pension plan are signatory to a collective bargaining agreement. Only those contractors who are signatory have the multi employer pension and only they can contribute; therefore, they are the only companies individuals can work for and accrue pension credits.*

Second, its complexity is greater than the other two. If a change is needed to be made with the single employer and the government pensions there are less hoops to jump through; less red tape if you will. With the multi employer pension, however, the additional complexity is built in as a safe guard. This sometimes can be a burden, though, as will be demonstrated later.

Third, and perhaps most important, is the fact that multi employer pensions, because of a number of other factors, are in trouble. Not all of them, mind you, but a good number of them are. There are a number of reasons for this and while I cannot be exhaustive in listing them I can mention some I am certainly aware of.

Now, I’m assuming a basic understanding of what pensions are is understood if you are reading this. If not, I have a basic post regarding pensions in general as retirement funds.

I would like to go through multi employer pension pros and cons (perceived or real) and we can see how things look. Afterwards, the realities of these types of plans will be discussed as well.

Pros

Off the jump the main positive point is a transferable pension I mentioned earlier. With a single employer pension, an employee only gets credits as long as they are working for that employer. If they leave that company and go to work for another they don’t lose their pension with their former employer (unless they were not vested) but they restart the clock on getting vested in the new employer pension. The pension credit accruement from one company to another is likely to be different too. The government pensions have the same limitations single employer pensions have as far as non transferrable pension credits.

The multi employer pension, however, is designed for portability. An individual can work for many companies over the years and their credits are all from the same pension plan. Once they are vested (typically 5 years) their credits do not restrict them to only working for a specific company.

As you can imagine, this is very helpful when someone gets laid off and has to seek employment from another company. As long as the company they go to work for contributes to the multi employer pension plan they can keep their pension credits rolling.

Some multi employer pension plans have an additional portability feature that allows an individual to get pension credits even if a person is out of town working and for a non contributing contractor. Let me explain:

When an ironworker travels, he works for a company he has never worked for before – and he is out of town. This contractor does not contribute to his multi employer pension plan back home but does contribute to another multi employer pension plan on his behalf. The money can then be transferred to his pension plan back home. This is what ironworkers call Money Follows the Man. This is a wonderful concept which enables ironworkers to travel all over the country meeting the skilled labor demand, work on a multitude of projects, and yet continue accruing pension credits.

I said some pension plans because not every multi employer pension plan does this. Furthermore, I only know the basics of the ironworkers pension plans and how many work. The pipefitters do things differently as do operators and any other skilled trades and how they accrue credits by different areas of the country I am unaware. I would be glad to have some insight from any who know how differing plans work.

*NOTE: if I’m not mistaken, pipefitters have one large pension plan contributed to by all of the various locals vs each local having their own pension plan like ironworkers have. They share some basics, are both considered multi employer pension plans, and yet their structures are different overall. That’s what I mean when I say some trades/crafts do things differently.*

Another benefit is simply the pension itself. I know of guys who labor for low wages and have nothing to show for it. They have no fringe benefits and therefore they have no pension or any form of retirement at all. To have a pension (and an annuity) is to have something in a world where many have nothing. I count that as a perk and so should you.

A third perk is with multi employer pensions you have several trustees, labor and management, who over see the plan to ensure everything is done for the plans successful existence and continued growth. Granted, uneducated individuals can make uninformed decisions (which most certainly has been done) but having several people govern the plan affords it safeguards. This is not to say the single employer plans do not have safeguards but there is an extra level of safety especially if changes are to be made.

Cons

There has been much mismanagement regarding multi employer pension plans in the past, resulting in many plans facing troubling times today. Some of it was from uneducated trustees regarding investments and their roles in general. Typically speaking, ironworkers are the labor trustees in an ironworker multi employer pension plan, pipefitters are the labor trustees on their plans, millwrights are the trustees on theirs, etc. They are experts in their respective fields but in the past when things were going well they may not have been too informed regarding investments and returns, projections and overall health of pension plans. This has been made manifest by the condition of many pension plans across the country.

Now, before I get any nasty emails saying I am blaming the many problems these plans are facing on trustees I AM NOT. I fully understand the markets role in this as well as the government (which there were some rules in place that most certainly had a hand in not helping the situation and I would argue hastened many a plans demise) BUT if we are honest we should acknowledge the shortfalls wherever they be, even if, no, especially if they originate where we would least like to admit.

Another downside to a multi employer pension plan is that if things turn south you could be in for a rough ride for a very long time. Many single employers have already phased out their pension plans converting over to 401ks, shifting burden for retirement savings to employees. Certainly we should save for retirement on our own but hopefully it is to supplement what we already have. Some are dealing with the reality of pension cuts in efforts to stabilize pension plans for the long haul and this can be especially painful when someone is expecting the same amount of money every month – their bills are set by it. The older one gets the less likely it is that person is going to work a job and get some overtime to help offset the pension cuts very possible for many in the future.

An additional con is how some of these plans were set up structurally. I know some that have a full pension credit established at a set amount of hours and that’s it; any additional hours worked go into a slush fund if you will while you get no credit for them. Additionally, some plans have a cap of how many years you can get out of a pension.

Let’s say a particular pension plan requires an individual to have 1300 hours in a year period to get a full years credit. For many who work steady, they may see hours close to 2000 for the year. Because they meet the threshold of 1300 hours they get the pension credit for the year but the extra 700 hours they worked for the year they received NOTHING for them. Those hourly contributions went into the fund but return nothing for the individual who contributed them. This may go on for years on end and I personally know many who have experienced this.

Then there are some plans who have a max year cap, meaning they can only get pension credits for oh, let’s say 35 years and then they are maxed out. So, if they started contributing to the plan at age 20, don’t plan on retiring until 65 (some plans have that age as retirement age) they will reach a cap by age 55. They will by then have 35 years vested in the pension and should they elect to stay in the trade and work an additional 10 years they are contributing to the pension plan for 10 years with NO RETURN.

Those two problems are most definitely a CON. I fully realize there are pension plans that have hours that can roll over and accumulate, others have different hour requirements, some have no year limit, and others figure their retirement age by years of service and age. There are A LOT of variations between plans but I know plans that have the above problems and they are not good systemic problems to have.

Another con, and it seems trivial in many respects, is you don’t have any real control except how many hours you work to contribute to the plan. You have no control as to how the money is managed, invested, protected, projected to grow, etc. Most people I know like to have as much control over things as possible and I can’t see why their pension plan is any different.

Coupled with the above, I would say an unintentional consequence (and subsequently, a con) is the promise of a solvent and healthy pension many didn’t feel the need to save themselves for retirement. They were promised lifelong income and they went into retirement or were close to it thinking they had money coming in when in reality many will experience deep cuts.

In contrast, if they had been more proactive in saving for retirement themselves they would have more to live off of AND be able to exercise more control over their retirement funds.

Of course, individuals aren’t going to get much if any control regarding the pension plan but when you do a cursory internet search and see how many multi employer pension plans are in trouble it certainly makes people wish they had more control. “Perhaps the plans wouldn’t be in such disarray,” they say to themselves and anyone who will listen, “if we could have controlled it more.” Of course those who know about the many issues plaguing multi employer pension plans know this reasoning is faulty but its human nature to complain about problems, even when from a legal standpoint there isn’t much to be done.

What problems am I referencing?

Bear with me on this, because some explanation is due and this may take a bit to unpack. Hopefully I will have done a good job of it (you’ll know if you understand it – the true measure of whether I knew my material is if I can explain it to others) and once explained we will be able to see that it was a myriad of things that led to the trouble multi employer pension plans experience today.

The governments role

The federal government had in the past two specific rules (or laws, however you wish to classify them) that greatly limited multi employer pension plans.

First, there used to be a 100% cap on pension plans; that is, the government wouldn’t let pensions be more than 100% funded, also known as overfunded.

At the outset this doesn’t seem like a problem. After all, if you have a pension plan that’s 100% funded all’s good, right?

If your pension plan was approaching over 100% funded (remember being funded is a good thing) the trustees had essentially one of two options: give employers money back or increase pensioner benefits. Guess which one trustees picked with regularity?

Now, the other rule in place was the 25% rule which said no more than 25% of the wage rate could be put into retirement accounts. For most this meant pension and an annuity fund but the gist was no more than a quarter of your wage could be used to fund retirement.

Let’s look at real numbers to put some perspective to this:

Let’s say your wage rate is $32.00 an hour. Remember, this is just your wage and NOT benefits. Also think back to mid 2000’s when many wage rates weren’t that high (many still are not) but for an example this will suffice.

$32.00 ÷ 4 (25%) = $8.00.

With $8.00 being 25% of the total wage rate, this meant the pension and annuity fund could only have a combined total of $8.00 in them both.

Maybe the pension contribution was $6.00 an hour and the annuity fund was $1.50 per hour. This meant there was only an additional .50 cents to put in either fund and that’s it; you were maxed out at 25%.

*Note: most annuity funds had far less contribution rates in them because for many they were relatively new.*

Again, while pensions and their investments were doing great trustees kept those plans from exceeding 100% in accordance with the government by increasing benefits.

Then 2008 happened. At this point it doesn’t matter why the market did what it did so much as what affect it had on multi employer pension plans.

It was not good.

Many plans began to experience losses in their investments and they began to see funding declines. All in all that’s one thing; being unable to do something about it is another.

You see, the 100% funded cap rule kept trustees from protecting pension plans WHEN, not IF, a downturn happened. But now, with a decline, they could attempt to shore up plans but wait: let’s not forget the 25% rule.

Now many plans were in a tight spot. They were already at 25% between the pension contribution and annuity fund and now although they didn’t have to worry about overfunding the pension plans (because of the decline) their hands were tied simply because they couldn’t contribute any more money: they were at 25% of the wage.

Now some are probably asking why money wasn’t diverted from the annuity contributions to pension contributions, shoring up the one in trouble.

Perhaps some plans did. Many did not, however. Many a man thought about the shape of the pension plans they had, saw their decline, and in the spirit of diversification opted to keep the annuity fund funded as they were. Many thought their annuity fund was the only real retirement option they had, and were not willing to move money to a declining plan – never mind the 25% rule.

The government has since abolished both rules but it was too little too late for many plans; the damage was done.

The very thing the government didn’t want they helped facilitate. Large retirement plans swaying the market is now a reality but in a bad way. There is a real mess for us to have on our hands which can only be delayed for so long; it MUST be dealt with eventually.

I fully realize there are more reasons as to why some multi employer pension plans are in bad shape but for many plans the above rules were akin to throwing gasoline on a smoldering flame.

In theory, the multi employer pension plan is the best of all pension plans: it has great portability, offers stability for the worker, and frees up a contractor when work is slow. It promises lifelong security via some financial merit along with peace of mind.

In reality, however, there have been some systemic problems in the past 10 to 15 years that have plagued this country as a whole. I would even argue so fundamental were/are the problems we have they have forced us to completely rethink retirement as a whole. Things cannot remain the way they are; something has to give.

Well, this is a good spot to end the post. The next post will delve into presented solutions, attempted fixes, and perhaps what we can expect in the future.

*Note: This is part 1 of a mini series on multi employer pensions.*