Compliance June 15, 2018

Long-Term Loans Seen As Solution for Multiemployer Pension Crisis

Senator Sherrod Brown calls it imperative "to find a bipartisan solution to the crisis threatening 1.3 million Americans."

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In kicking off testimony before the Joint Select Committee on the Solvency of Multiemployer Pension Plans, Senator Sherrod Brown, D-Ohio, committee co-chair, said it is imperative “to find a bipartisan solution to the crisis threatening 1.3 million Americans.”

If a solution is not found, “claims for financial assistance by plans will quickly bankrupt the Pension Benefit Guaranty Corporation [PBGC] multiemployer insurance program,” Christopher Langan, vice president of finance for United Parcel Service (UPS), told the committee. “Retirees under these plans would then see their benefits drop to just a fraction of the already modest benefit guarantee.” Langan said the crisis is the result of “macro changes to many of the established industries in the United States with significant multiemployer plan participation and the 2008 market crash—which happened when many plans were still recovering from the earlier burst of the dot-com bubble.”

Langan said the macro changes include deregulation of industries, which gave rise to nonunionized workers, increased competition from foreign companies, and outsourcing of work to other countries. In addition, he said, the number of Baby Boomers retiring is putting pressure on the system, all the while participation in multiemployer plans has declined. The ratio of retirees in multiemployer pension plans rose from 48% in 1995 to 63% in 2013, he said. This has resulted in many companies going bankrupt and pulling out of a multiemployer plan, which increases the pressure on the remaining companies, he said. Finally, there has been an unusually low-interest-rate environment since the 2008 recession, he said.

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The solution is not to require employers to contribute more, Langan said. Since the passage of the Pension Protection Act of 2006 (PPA), many employers are contributing twice what they were before the law was enacted, he said. To require employers to contribute more might put them out of business, exacerbating the multiemployer pension plan crisis, he said.

Furthermore, reducing benefits for retirees is not an option, either, as they have been counting on these benefits, Langan said. “For many participants, their modest pension benefits and Social Security are the only available source of income in retirement, and they have no other meaningful source of savings,” he said.

Langan said that a long-term, low-interest-rate loan program “could save the most troubled plans without imposing undue hardship on participants, contributing employers, the PBGC, the federal government, taxpayers or healthy plans.”

Aliya Wong, on behalf of the U.S. Chamber of Commerce, agreed with Langan that required employer contributions have become onerous and told Congress, “The contribution rates that many employers are currently paying into multiemployer plans are exorbitantly high because the contribution rates for the last several years have been imposed by the plans’ trustees via rehabilitation plans.”

Like Langan, Wong agreed that long-term, low-interest loans may be the solution. “While the PBGC may ultimately need more money, in the form of increased premiums paid by employers, these increases must be evaluated after tools to restore the solvency of these plans are put in place,” she said.

Mary Moorkamp, on behalf of Schnuck Markets, said, “The Food Association believes that the solution to the multiemployer funding crisis will require multiple phases. The fundamental rules governing multiemployer plans date back nearly 40 years and have not kept pace with the new economy, changing demographics, and today’s mobile work force. The system needs to be overhauled.”

That said, Moorkamp said the crisis is so pervasive that “immediate action is needed, and any realistic action must involve some federal loan structure, coupled with contributions and sacrifices by all other stakeholders.” She said that a long-term, low-interest-rate federal loan program should be paired with  reductions in benefits and increased PBGC premiums.

Burke Blackman, president of Egger Steel Co., suggested that the committee independently assess the underfunding of multiemployer pension plans. His second recommendation was to “transition ‘orphaned’ beneficiaries to the PBGC,” and a third was to “stop making new defined benefit [DB] commitments”—rather, to open defined contribution (DC) plans. “The pension system may require federal loans to satisfy its short-term cash flow needs, but if it stops making new commitments while continuing to collect contributions, it will eventually be able to pay back its loans. We need to admit that the era of defined benefit retirement plans is over,” he concluded.
Administration June 15, 2018

PSNC 2018: Retirement Industry Leaders Discuss Top Trends

Drew Carrington and Michael Knowling review the 8 most talked about retirement industry topics.

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Day One of this year’s PLANSPONSOR National Conference (PSNC) included a summary of the most widely discussed subjects in the retirement industry.

 

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Led by seasoned veterans in the institutional retirement planning space, Drew Carrington, head of institutional defined contribution – U.S. at Franklin Templeton, and Michael Knowling, head of client relations and business development at Prudential Retirement, the discussion delved into the eight topics that, they’ve found, for sponsors are most top of mind—from financial security in today’s economy to the use of white label funds and collective investment trusts (CITs) in retirement plan investment menus.

 

Starting off the discussion, Knowling explained the challenge to achieving financial security in the U.S., emphasizing the financial crisis in retirement preparedness. He blames people’s lack of savings, insurance and planning for the predicament.

 

“One-third of Americans are not covered by a pension or savings plan,” he said, citing a 2016 GoBankingRates.com study. “When you ask them what is their plan, they say they’ll continue to work. That is not a good plan.”

 

Besides the one-third of Americans without a retirement or savings plan, 44% of workers are delaying retirement, according to a PwC survey, and two-thirds of employees believe they will outlive their retirement savings, a Northwestern Mutual study found.

 

“What’s alarming is, for those born today, the life expectancy is 88 for males and 91 for females,” said Knowling. “[The lack of savings] is a growing trend workers need help with.”

 

To offset low savings, Knowling suggested, employers should focus on three areas with their participants: planning, savings and protection. Ask your workers where they are today and what they envision for their future, he said. Then have them concentrate on the basics, whether that’s establishing a budget, creating an emergency savings fund or planning for health care costs.

 

Once workers take this initial step, then their focus can shift toward secondary items such as managing debt, saving for a first home or first child, or estate planning, Knowling said.

 

“As [to] protection, we spend a lot of time thinking about wealth and savings,” he said. “It’s also making sure [your employees] have life insurance, disability coverage and that they’re preparing for lifetime income.”

 

Additionally, structured retirement tiers were discussed in the session, with Carrington using to the term to encompass all groups of participants, whether they be long-term or new employees. “You’re going to have long-term employees; you’re going to have other participants who are relatively new to the plan,” he said. “We think that a tier has more than one thing in it, it’s not just a list of investments. It’s plan design changes, providing tools, coaching, etc.”

 

Other topics were retirement income product development, managed accounts, menu specification and emergency savings—otherwise known as rainy-day funds. When asked if their company offered an emergency savings plan, less than 3% of polled PSNC audience members responded, yes.

 

According to Knowling, employers that help workers meet short-term needs through such savings plans, and by adding contributions, can improve participants’ financial literacy and engagement with the idea of saving. “It creates financial confidence, and confidence leads to literacy. If people are confident, they’re more likely to make better decisions than if anxious or worried,” he observed.

 

Menu specification, a once-popular model that reduced 401(k) options to simplify investment menus, now has an addendum. Instead of limiting options to increase engagement, add options, Knowling recommended. This will benefit both participants and investment managers. “If you have very few investment options, it’s hard for an investment manager to construct portfolios,” he noted.

 

As for trends in investments and technology, Knowling and Carrington cited the impact of white label funds and CITs, as well as mobile engagement, on plan design.

 

Carrington noted the growing popularity of the two investment vehicles, and that CITs have overcome their reputation as a “clunky” investment. For 401(k) plans, CITs are less expensive than mutual funds and can be highly personalized—participants can construct their own funds, deciding what they want for an active/passive mix.

 

Along with framing these tools as solutions, Knowling and Carrington examined how communication drives participant engagement. Knowling noted the continuing shift toward the mobile world and the growing trend in voice-mobile technology.

 

“Texting or mobile engagement is not a new channel,” he said. “But it is fundamentally people who want to engage, and it’s part of our lifestyle,” he said.

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