Should Multiemployer Plans Be Replaced by 401(k)s?

This was one suggestion made by a witness at the U.S. Senate Committee on Finance hearing about multiemployer pension plan reform.

During a hearing held by the U.S. Senate Committee on Finance, the main issue was the benefit cuts allowed for certain plans under the Multiemployer Pension Reform Act (MPRA).

Under the MPRA, plans that are in “critical and declining status” are allowed to avoid insolvency by reasonably cutting benefits, including those already in pay status. They must apply to the Treasury for permission to cut benefits. Currently, the Treasury has three requests it must consider. 

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The committee heard from Mrs. Rita Lewis, a beneficiary of the Central States Pension Plan—the first plan to request permission to cut benefits. Lewis noted that Central States says the average cuts are around 22.5%, but other plan members she’s talked to have been told their cuts will be 40% to 70%. She shared stories of plan members or beneficiaries who will be affected by these cuts and are unable to return to work or are too old to make up the loss from investments. Some are considering selling their homes.

But, in his testimony, Joshua Gotbaum, guest scholar, Economic Studies Program, The Brookings Institution, and former director of the Pension Benefit Guaranty Corporation (PBGC), said the alternative to a planned benefit reduction under the MPRA is even worse. “What MPRA did was to allow plans that otherwise would fail entirely to preserve benefits and keep them from falling all the way to PBGC levels,” he said.  “Under MPRA, severely distressed plans can propose a plan to cut benefits, but in every case a participant gets at least 10% more than what PBGC would provide.”

Gotbaum contended that in many cases, vulnerable participants suffer no cuts. For example, in the Central States proposal currently being reviewed, about one-third of participants would suffer no cuts at all.

NEXT: Solutions other than benefit cuts

“Without MPRA, Central States and other distressed plans will become insolvent—and most participants’ pensions will be cut far more,” Gotbaum continued. “Even worse, the insolvency of Central States would completely drain PBGC’s multiemployer reserves, so participants would end up being cut far below PBGC guarantee levels. One analyst estimated that, if PBGC becomes insolvent, ongoing premiums would only cover about 10% of Central States pension benefits—that would mean a 90% cut.”

Gotbaum advocated for higher PBGC premiums for multiemployer plans, saying the agency has insufficient funds to implement actions allowed by the MPRA to help distressed plans—merging plans or partitioning plans.

Witness Dr. Andrew G. Biggs, resident scholar at the American Enterprise Institute, offered what he calls a solution to the problems with multiemployer plans: switching to robust defined contribution (DC) plans. “If employers wish to provide a solid plan to supplement their employees’ Social Security benefits, they can take advantage of recent enhancements to defined contribution retirement plans,” he said.

He noted that most employers now automatically enroll participants in plans, and most participants are in professionally managed target-date funds (TDFs), which automatically reallocate their portfolios to reduce risk as they approach retirement. He cited a Vanguard study that “showed that, for the five-year period ending in 2012, individual investors holding target-date funds earned the same return as state and local pension plans, which supposedly are much more sophisticated investors.” Biggs also pointed out that fee pressure has pushed down costs for DC plans and introduced more low-cost investments. Finally, he noted the Treasury Department has enacted regulations making it easier for 401(k) plans to incorporate annuities, which convert lump sums into a guaranteed income that lasts for life.

“What employees need are well-designed, well-run defined contribution plans that offer automatic enrollment at responsible contribution rates coupled with simple and low-cost investment options such as target-date funds,” Biggs concluded.

Women's Financial Outlook Improves

Half are positive about their financial futures, up from 46% a year ago.
American women are feeling more optimistic about their financial futures and more confident about their money-related decisions, according the BlackRock’s latest Global Investor Pulse survey.

Just over half, 51%, feel positive about their financial futures, up from 46% a year ago. Forty-two percent are confident they are making the right savings and investment decisions, up from 34% a year ago.

Both women (43%) and men (41%) believe that saving for retirement should be a high priority, yet only 55% of women and 65% of men are actually saving for retirement. Perhaps as a result, 75% of women and 68% of men are concerned about their ability to meet their retirement goals.

“It’s clear that women need to become much more active in managing their money toward urgent long-term goals, particularly retirement,” says Heather Pelant, head of personal investing at BlackRock. “But our survey also indicates that women have some key positive financial instincts that can lend valuable support to their saving and investing efforts.”

As to how much annual income they would like to live on in retirement, the goals are similar for men ($45,956) and women ($45,018). The stark reality, however, is that women between the ages of 55 and 65 have accumulated an average $118,000 in savings, which would provide an average of $7,782 in annual retirement income, according to the BlackRock CoRI Index 2015. Men in that age group have an average $162,000 in savings, which would generate an average annual income of $10,807.

Not surprisingly, then, 36% of men and 52% of women said they were concerned that they might not achieve their desired retirement income goal.

NEXT: Women’s and men’s approach to finances
 
Women tend to emphasize the day-to-day health of their household’s finances and paying off debt, while men are more focused on investments. Sixty-one percent of women follow a household budget and 55% are focused on paying off debt, but only 23% regularly review the performance of their savings and investments. On the other hand, 33% of men regularly review their investments, and 46% concentrate on paying down debt.

Men also put a greater priority than women on growing their wealth (35% versus 28%, respectively), holding on to their wealth (26% versus 20%) considering themselves an investor (40% versus 22%) and having less of their portfolio in cash (60% versus 71%). Men are also more likely to say that they enjoy managing their investments (46% versus 26%). When asked how the idea of investing makes them feel, men are more likely to associate words like “hopeful” and “optimistic,” while women most associated “nervous” and “risky.”

When women make growing wealth a priority, 63% have investments, versus 28% who do not have this as a priority, and they are twice as likely to regularly save and invest.

Women are more highly attuned to risk than men and are more cautious about the stock market. They are also more likely to ask for advice with regards to their investments (64% versus 55%) and to value professional advice (74% versus 64%).

“Overall, in deploying their money, women are more focused on managing risks to their financial security and stability over the short term, and men are more focused on achieving long-term money goals,” Pelant says. “In fact, men and women have a lot to learn from one another, as good financial and investment planning needs to reflect both objectives.”

NEXT: Millennial women
Thirty percent of Millennial women, those between the ages of 25 and 34, enjoy managing investments, compared to 21% of Boomer women, those age 51 to 69. Thirty-seven percent of Millennial women have prioritized growing wealth, compared to 22% of Boomer women.

However, when it comes to saving for retirement, only 53% of Millennial women are doing so, compared to 71% of Millennial men. They are also considerably less likely than their male peers to feel knowledgeable about investing.

Only 35% of Millennial women use the Internet for information on long-term financial decisions, compared to 43% of Millennial men, and only 45% of Millennial women are interested in robo-advisers, compared to 72% of Millennial men. That said, a mere 23% of Boomer women are curious about robo-advisers.

“For many investors, technology is playing an increasingly meaningful role in their decision-making, either supplementing the advice of a human advisers or representing a primary source of support,” Pelant says. “It’s encouraging that younger women are attuned to the potential benefits of technology because, as with many financial habits, becoming comfortable with the role of digitally delivered guidance early on can yield benefits throughout one’s investing life.”

BlackRock’s survey is based on the responses from 30,500 people in 20 nations, including 4,000 Americans.

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