Benefits November 17, 2017

Leadership Forum Urges Update of Open MEPs

Any large-scale action on retirement reform will require trust, a willingness to take risk and experiment, and a sense of the greater good.

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J.P. Morgan Asset Management this week hosted an informative video webcast on the topic of “Building a More Robust and Inclusive U.S. Retirement System Amid a Changing Economy.”

PLANSPONSOR was invited to attend the live event and to speak afterwards with the presenters, who included Anne Lester, head of retirement solutions for J.P. Morgan Asset Management, as well as Ida Rademacher of The Aspen Institute Financial Security Program.

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Their presentation mainly focused on lessons learned from the April 2017 inaugural Aspen Leadership Forum on Retirement Savings, held in Middleburg, Virginia. The forum brought together roughly 60 senior leaders from industry, government, academia and the lobbying community to discuss “breakthrough solutions to one of the most critical financial challenges facing American households—the lack of adequate savings for retirement.”

Reporting her experience at the forum, Rademacher said at least one thing is very clear: “Any large-scale action on retirement reform will require trust, a willingness to take risk and experiment, and a sense of the greater good.”

Among the diverse stakeholders there was actually significant agreement on the challenges facing U.S. retirement savers—as well as those workers who aren’t saving at all. Rademacher ran through the list: “Millions of Americans have no easy way to save for retirement through work. While forum participants disagreed about the exact size of the gap and how best to measure it, most agreed that it was a fundamental shortcoming of the current system that not everyone has an opportunity to save at work. There was further widespread agreement about the challenge presented by increases in longevity. Even as workers face economic headwinds, they are generally enjoying longer lifespans—and thus longer and frankly more expensive retirements.”

During the presentation both Lester and Rademacher repeatedly stressed the huge opportunity open multiple employer plans, or “open MEPs,” offer for broadly improving retirement readiness in the U.S. workforce. This approach would allow small employers to take advantage of the same economies of scale that make large 401(k) plans effective savings vehicles from both the perspective of the employer and the employee. 

Both speakers noted that the Pension Protection Act of 2006 has helped many employers implement increasingly successful individual retirement savings programs. In short, they argued, employers that are committed to automatically enrolling employees into a robust defined contribution (DC) plan that features automatically diversified and rebalanced portfolios are already seeing success in boosting retirement readiness among populations of workers not offered a traditional defined benefit pension plan.

“It is simply common sense to open up this effective DC system to more workers through open MEPs,” Rademacher stated. “Open MEPs will take the pressure off of small employers while delivering professional management and support to individual savers.”

Both Lester and Rademacher suggested they have seen an increasing number of members of Congress “become interested in the open-MEP issue as a way to solve one of our biggest challenges.” So far there is not quite enough political will to take up open-MEPs as a stand-alone issue, the pair agreed, but this could very soon change.

“Although forecasting the future is a risky undertaking, there is no doubt that the retirement system will continue to undergo significant change for the next few decades,” Rademacher concluded. “The nature of the change, however, is not predetermined. Decisions made by those leaders today in government, business, academia and the non-profit sector, will shape the system the next generation inherits.”

Data and Research November 16, 2017

CRR Assesses Options for Helping Multiemployer Plans

In an issue brief, researchers for the Center for Retirement Research at Boston College discuss plan partitions, benefits cuts, subsidized loans and tax payer support.

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Just as Democrats in Congress unveiled actions to save multiemployer pension plans, the Center for Retirement Research (CRR) at Boston College released an issue brief assessing options for helping these plans remain solvent.

The brief notes that while most multiemployer plans have recovered from two financial crises since 2000, a substantial minority face serious funding problems. According to CRR researchers, in addition to being buffeted by financial crises, multiemployer plans generally face three major structural challenges. First, the lack of new entrants leads to a very high percentage of inactive members.  Second, withdrawal liability—the payments required when an employer exits a plan—is often inadequate so that orphaned participants—workers left behind when employers exit—create a burden for remaining employers. Finally, the construction industry, which supports the largest component of multiemployer participants, is highly cyclical.

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The researchers estimate that “the hole” for plans in critical and declining status is $76 billion, based on the current view of funding that uses the market value of assets and values liabilities using a four-year average yield on 30-year Treasuries for the discount rate.

The Multiemployer Pension Reform Act of 2014 (MPRA) allows multiemployer plans to request a partition from the Pension Benefit Guaranty Corporation (PBGC) and also allows plans in critical and declining status to apply to the U.S. Treasury for suspensions of benefits.

Partitions have some evident appeal, the CRR researchers say, contending it has been clear for decades that the withdrawal liability procedure is flawed and bankrupt firms often pay little to nothing. While researchers found partitions would put tremendous cost on the PBGC—$35 billion for critical and declining plans—their analysis showed it would restore solvency to these plans.

Subsidized loans and tax payer support

According to the issue brief, two organizations, United Parcel Service (UPS) and the International Brotherhood of Teamsters (IBT), have suggested subsidized loans as a way to address the financial challenges facing multiemployer plans. The main issue CRR researchers found with this proposal is the total amount of loans that would be needed and the costs they would incur.

The issue brief notes that the PBGC’s multiemployer program is in a dire financial position. It argues that increasing PBGC premiums would not be a viable solution to the multiemployer plan crisis. The researchers’ analysis indicates that a premium of $156 per participant would eliminate the chance of multiemployer program insolvency. However, the issue brief says, “premiums of $156 could place a burden on severely underfunded plans where employers have already seen substantial contribution increases.  Adding this increase to what employers are already paying for their rehabilitation plan may be enough to induce more employers to withdraw.”

Regarding benefit suspensions or cuts, the researchers used as a base case the Central States, Southeast and Southwest Areas Pension Plan—the first plan to apply for, and be denied, suspension of benefits. They first observe that with the cuts, the expected present value of (mostly younger) retirees’ benefits declines substantially, while the present values of the lifetime benefits payable to current participants and new hires all increase.  However, while retirees see their benefits decline in net present value terms, their welfare under a MPRA-type approach—in the aggregate—is essentially unchanged. The reason is that retirees receive smaller but steady benefits, which allows them to better smooth consumption over their lifetimes.

Some have suggested taxpayer support for troubled multiemployer plans. One argument for tax revenue is that many of the retirees and inactive vested participants are orphans who worked for companies that are no longer in the plan, according to the CRR researchers.  As a result, companies and workers still in the plan are being asked to pay not only their own costs but also the funding shortfalls of others.  Employers in the most distressed plans have increased their contributions, but when orphans account for more than half of total participants—as is the case for the Central States plan—the burden can become intolerable and more employers may negotiate to leave, further eroding the contribution base and potentially creating additional orphans. 

“Thus, while increasing taxes is never popular, rationales exist for taxpayer money to be part of a broader solution that covers not only those classified as ‘critical and declining’ but also those heading for trouble,” the issue brief says.

The Keep Our Pension Promises Act, a precursor to bills just introduced by Congressional Democrats, would involve shifting a portion of liability for the worst-off multiemployer plans to the Pension Benefit Guaranty Corporation, the issue brief notes. The legislation would establish a legacy fund within the PBGC to ensure that multiemployer pension plans can continue to provide pension benefits to every eligible American for decades to come.

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