Guild has an APP for America's deepening retirement crisis
STACKING UP - Like a plate of pancakes, the Guild's Adjustable Pension Plan gives employees a benefit for each year of work that is guaranteed to be there when they retire. Each annual benefit gets stacked up, year over year, so that by the end of their careers, employees get monthly retirement income that's based on their average career earnings.
U.S. regulators OK innovative pension plan
An innovative Guild-pioneered pension plan that could become a blueprint for helping to resolve America’s deepening retirement crisis has received the federal government’s blessing, making it a readily available union bargaining option that removes employers' main fear about traditional pensions.
After 17 months, the Internal Revenue Service issued a “favorable determination” letter on June 18 for the Guild's Adjustable Pension Plan (APP), which was conditionally accepted by New York Times management as part its November 2012 collective bargaining agreement.
As such, the plan, which looks almost like a 401(k) from the employer's perspective but still gives employees a federally-guaranteed monthly benefit for life when they retire, becomes a confirmed term of employment for more than 1,000 Guild members at The Times. An application for an identical plan at Consumer Reports, which also accepted the APP in its contract, is still pending at the IRS.
“Now that the APP is in place at The Times, we plan to propose it wherever our members would like to have it, and we would encourage other unions to do the same,” said New York Guild President Bill O'Meara.
Both companies – the Times, which is publicly traded but family-controlled, and Consumers Union, which is non-profit – had previously frozen the traditional pension plans that covered their nonunion employees and had come to their bargaining tables demanding that the same be done to Guild-covered employees. In exchange, they offered modest improvements in their contributions to 401(k) plans.
A BETTER ALTERNATIVE TO A 401(K)
Working with actuaries at the Cheiron consulting firm, the Guild came up with the APP, which would shift some risk, as well as opportunity, onto employees, but would still leave them far better off than they would be with a 401(k) account alone, according to actuarial projections. The process required a major educational campaign for the managements of both companies, as well as for Guild members.
CU members getting APP briefing
In agreeing to accept the brand new and untested APP, The Times and Consumers Union insisted on deadlines for IRS approval. In the case of The Times, had the IRS not issued its favorable determination letter by the end of July, the APP would have been snuffed and its employee assets folded into the company's 401(k) plan, along with a higher employer match. The deadline for IRS approval in the Consumers Union contract is March 2015.
Imposing a deadline on an agency not known for its swift consideration of pension plans, let alone ones it had never seen before, made for some nail-biting
moments along the way that were exacerbated by last fall's two-and-a-half-week furlough of federal employees and a period of bureaucratic paralysis that followed the revelation that the IRS's Cincinnati office – the one handling the APP application – had given extra scrutiny to the tax-exempt applications of some conservative groups. As a result, the Guild took behind-the-scenes steps to keep its application from falling through the cracks.
“We were always confident that IRS would eventually approve the APP,” said O'Meara. “But we were less certain that the approval would come before the
deadline in the Times contract. If the IRS had missed the deadline, the effect would have been the same as if it had rejected the APP.”
A TREND TOWARD RETIREMENT INSECURITY
The approval comes amid a decades-long trend in which employers, under pressure from Wall Street, have been shedding defined benefit pensions in favor of defined contribution plans, like 401(k)s, which were introduced more than 30 years ago to supplement traditional pensions. The Great Recession accelerated the trend, as more employers became saddled with ballooning, unpredictable unfunded liabilities, because their pension plans were failing to meet often overly optimistic investment goals.
By the end of 2012, the number of federally insured single-employer pension plans had fallen to 20 percent of the 112,000 plans available in 1985. The disappearing plans were often replaced with 401(k) and other plans in which the employer's only financial responsibility to is to make a set contribution, and where workers are given an undetermined amount of cash at the end of their careers. As a result, the risk and responsibility of retirement planning was transferred to workers, who were often unprepared to be their own investment managers. The Employee Benefits Research Institute reported earlier this year that more than two-thirds of workers have less than $50,000 in retirement savings.
A plan that eases employers'pension-phobia but still gives employees
The APP addresses employers' pension-phobia by requiring only a set contribution, like a 401(k). It has a self-correcting mechanism that keeps it fully funded, while still offering employees guaranteed retirement income. It is composed of elements of already-approved traditional pension plans, but combines them in an unprecedented way. Its key components are:
– Employee benefits are calculated annually, for each coming year, based on interest rates, market performance and actuarial and other factors. Each year's benefits are locked in. A Times employee who earned $100,000 in 2013, for example, can count on getting $1,200 in every year of retirement for 2013 alone.
– Each year, the benefit adjusts, as its name suggests, depending on market and other conditions. Employees risk having their next yearly benefit drop – or rise. At The Times, for example, the 2013 benefit was 1.2 percent of annual pay, while the 2014 benefit is 1.13 percent. Each year's benefit, which is guaranteed and federally insured like any other defined benefit pension plan, gets stacked, year over year, like a plate of pancakes. Employees get a retirement benefit based on their career earnings and always have a running total of what they will get.
– The employer makes an annual contribution as called for in the contract. In the case of The Times, it's 6.6 percent of payroll.
– Funds are invested conservatively in low-cost index funds, with more fixed income than equities. There is also a lower, more realistic projected rate of return than in most traditional pension plans, which are typically invested 60 percent equities/40 percent fixed income, and often take greater risks trying to meet their more ambitious investment targets.
– By adjusting its benefit annually, the plan self-corrects to its current conditions and is virtually assured of remaining fully funded. The Times plan remained fully funded even in models that put it through recurring market crashes. Barring an unprecedented financial calamity, employers will not incur the unfunded liabilities that have made them phobic about pension plans.
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