A Hybrid Retirement Solution or Pension Reform?
Once upon a time, you could work 25 or 30 years for one employer or in one industry and expect to be rewarded for your loyalty and hard work with a steady stream of pension checks lasting the length of your retirement. This benefit came courtesy of your defined benefit (DB) plan. A DB pension plan is a type of retirement plan in which your employer promises a specified pension payment that is typically determined by a formula based on earnings history or years of service.
Historically, labor unions and union employers have relied on DB pension plans as the fundamental component for attracting and retaining employees. Despite the latest Gallup poll that shows high support for labor unions among millennials and Gen Z, there is a generational cynicism that retirement plans are not an option for them.
Sadly, they may not be wrong.
Issues have emerged and challenged the sustainability of these multiemployer DB plans. People live longer, fewer employees enter these plans, and poorly designed tax rules and regulations combined with market volatility have contributed irreparable damage to many of these retirement plans. Some trade unions offer both a DB and a defined contribution (DC) plan. DC plans are not the standard in the multiemployer world and are more akin to 401(k) plans touted by many businesses and corporations. Workers predominantly fund these DC plans with their pre-tax payroll deductions, however, companies may make a matching contribution up to a certain amount. Taxes are deferred until the participant begins making withdrawals, typically during retirement when you are at a lower tax bracket.
A big concern with DC plans and 401(k) plans is that they require participants to be actively engaged with their investment selections. Unfortunately, financial literacy education on the value of retirement savings is either non-existent, lacks accessibility, or is not being adequately digested and implemented by the participants.
Hybrid plans are becoming an option to the traditional defined benefit or defined contribution plan. The term “hybrid” is an umbrella term that includes various retirement plan structures. All retirement plans are unique, and many variables contribute to building the hybrid retirement plan structure. However, there are ways to combine the positive elements of both a defined benefit plan and a defined contribution plan to give a more sustainable retirement.
Hybrid retirement structures have been around for decades, and their greater adoption could be a viable solution for saving multiemployer plans. On the podcast, I highlighted hybrid success stories in the public sector from Wisconsin and South Dakota as well as the UFCW Local 21’s transition from their legacy plan to a variable annuity pension plan or VAPP. These funds quickly improved their liability deficit and moved their plans from red-zone status into the green zone. Let me be clear. Nothing needs to change if you are a union member who is lucky enough to have a healthy DB plan and you are actively engaged in your DC plan (if you have one). But, if you are among the people whose DB retirement plan is distressed or you only have a 401(k) plan, you need to start saving more and educating yourself on your investments.
There needs to be robust multiemployer pension fund reform legislation. We have had several guests on The World of Multiemployer Benefit Funds who discussed pension reform and the potential pension crisis looms on the horizon for American workers. I’m glad Congress passed the American Rescue Plan Act (ARPA). It provides $90 billion in relief for 200 critical and declining DB plans that affect millions of retirees and participants. However, ARPA only provides pension relief. It doesn’t fix the problems because it isn’t pension reform. Given the state of partisan politics today, multiemployer pension fund reform is not imminent or likely.
Worker shortages could force employers to become more creative with retirement solutions in order to attract better workers. Multiemployer retirement plans can seize this opportunity to work together with their stakeholders to save these plans or transition them to a hybrid retirement solution. Both union employers and unions can help educate the up-and-coming generations on the availability of retirement options. Future retirement security for all Americans is critical and could help us avoid a coming retirement economic crisis. We are in a moment called “The Great Resignation.” With the COVID 19 pandemic, worker shortages, rising unemployment, and worker unrest, employers must get more creative to attract and retain employees. As COVID stimulus checks came to an end, pundits predicted that people would go back to work. However, this has not been the case. There are 10 million jobs to fill, yet people are quitting their jobs in record numbers. Perhaps, this is the perfect storm for labor to organize a new generation of union members and energize a movement towards a revised defined benefit retirement scheme. Organized labor has an opportunity to educate and promote the value of working for union companies—better wages, more substantial workplace safety practices, and future financial stability through pension plans, therefore, improving and raising the bar for all workers, union and non-union alike.