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Yes, the GROW Act — the best new retirement innovation you’ve never heard of (regular readers of this site excluded).
For quite some time, I’ve been insisting that Congress must come to a compromise with respect to a rescue and reform of multi-employer union pensions, with a combination of federal fund infusion plus changes to the multiemployer system to ensure that they avoid insolvency now and remain financially healthy far into the future. A solution is needed, and soon, but what that compromise should look like, in its particulars, I don’t have access to the relevant data, at the granular level necessary, to prescribe.*
But the GROW Act, which is indeed one small part of the HEROES Act but has been in the works for years, with its “composite plan” design, is a different and more straightforward story: the design elements of this “alternative multiemployer pension” have been carefully researched and, based on my reading from, and conversations with, its designers/promoters as well as my expertise as an actuary, this plan is a crucial next step — not just for multiemployer pensions but for all of us.
And given that the only way legislation seems to happen at the moment is by means of these mammoth all-encompassing bills (see the SECURE Act: a bipartisan bill with strong support which nonetheless was unable to pass on its own but only by means of finding its way into the larger budget bill even though it was not strictly speaking a “budget” item), now is the right time for the GROW Act to be included in this sort of mammoth bill, namely the anticipated “second stimulus” expected over the next month.
As a refresher, a GROW Act/composite plan (also called a hybrid or risk-sharing plan) would continue to provide protection against outliving one’s income or mismanaging one’s savings in a way that a 401(k) or other retirement savings account can’t. At the same time, it would be more affordable for workers than the only other choice they now have, an insurance-company annuity. And it would be more acceptable to employers than the traditional pension plans that they’re now fleeing whenever they can.
But what’s important is that the plan protects participants from the risk of underfunding by requiring a target funding level of 120% of “full funding.” This is similar to the “prudent funding” that plans in the UK require, or the “provision for adverse deviation” that’s familiar to insurance actuaries, extra funding as protection if circumstances don’t work out exactly as predicted.
And the plan has a well-defined process for reducing benefits during periods of underfunding, from less to more severe (for example, taking away cost-of-living adjustments before directly cutting benefits), to protect both employers and workers from paying ever-rising contributions to fund past benefits.
(See my May article, “The HEROES Act/GROW Act’s Composite Pension Plan Design Is The Right Path Forward – So Why Do Unions Oppose It?”)
Not long ago, to understand why the GROW Act is the future of multiemployer pensions, I talked to an expert in multiemployer plans for building trades. He explained that certain large, established, so-called “international unions” are focused on preserving the status quo**, but that building trades’ unions are looking at expansion, persuading new contractors to sign agreements to use union labor, and existing multiemployer pensions are a real stumbling block, that contractors who would be willing to agree to all the other terms of the contract (wages, work rules, etc.) will not agree to become a participating employer in a multiemployer pension plan.
Why?
In part, joining a poorly-funded plan means a substantial portion of the pension contributions they pay don’t build their workers’ pensions at all, but only pay down debts for past accruals. But even aside from this, they face a significant risk that their contributions could rise dramatically in the future, and they’d be trapped in the plan due to very costly withdrawal requirements. It’s easy to look at large employers like GE or FedEx
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and believe it’s only greed that leads corporate executives to end their workers’ pensions, but recall that even in a building-trades “green zone” pension plan I profiled a while back, contributions increased from $8 to $14 over a single decade, an increase of 75% — and to be clear, that means that, on top of cash wages, participating employers pay $14 per hour worked, into the pension fund. (And remember — this isn’t money that comes from a secret hoard somewhere, or is funded by wealthy CEOs forgoing another vacation house; this is, for the most part, funded by workers sacrificing pay raises.)
Would a new employer joining the plan on behalf of their employees in 2020 face a risk that their contributions would increase this much in the next decade? The GROW Act protects them, and sets the stage for new pension coverage for workers that would otherwise have none.
But what about the current pandemic and its market crash? Would composite plan participants see their benefits slashed in these cirumstances?
Not according to an analysis from early June which found that these plans would have done better than traditional plans. I’ll spare you the full details but cite a few sentences from the press release:
“A new study released today finds that composite retirement plans would have fared better during the coronavirus pandemic and related market declines than traditional defined-benefit multi-employer plans, allowing participants to receive higher benefits and attracting more employer participants. . . .
“The study found that while a multi-employer retirement plan that was certified in ‘critical and declining’ status suffered significant financial setbacks that are likely to result in the insolvency of the plan despite the recent implementation of a 15 percent benefit cut, a comparable composite plan would have performed more successfully. The participants in a similarly situated composite plan would have experienced a 5 percent reduction in benefits applied immediately after the 2008 crisis, which, in conjunction with the higher funding target, returned that plan to solvency. . . .
“The study also found that composite plans will achieve greater long-term employer participation than traditional pension plans. That is because the composite plans provide employers with the cost predictability they need to be successful in their businesses.”
Does this persuade you that the GROW Act would be good for union workers of the sort who are now a part of multiemployer plans?
That’s only part of the story. Not many of us are impacted by them, in that case, and it’s hard to get excited about that when there are so many other issues to draw our attention.
But the GROW Act is also the future of retirement for the rest of us.
How often have you heard worries that a future in which we all depend solely on a shaky Social Security system and on 401(k) or other retirement accounts, is one in which Americans are, in general, at risk of having insufficient income in retirement to maintain their preretirement standard of living or even meet their basic needs?
Yes, plan design changes over the years such as auto-enrollment and target date plans attempt to solve these problems. The SECURE Act is meant to make it easier to buy annuities — but annuities are still costly, because insurance companies must invest in low-return investments, that is, bonds rather than equities, and because only retirees in good health purchase them on their own. Were GROW Act-style plans to escape the narrow confines of the multiemployer pension world and become a mainstream type of pension plan for all kinds of workers at all sorts of employers, we would all benefit.
At the same time, I’m not aiming to set my readers to the task of persuading their representatives to open up GROW Act-style pensions to all comers. There is a clearly defined need for these plans within the multi-employer pension community. They have crafted this legislation and performed the analysis on how it would work within the general structure of multiemployer unions. It’s their baby. And, quite honestly, we need some guinea pigs, a means of getting these plans up-and-running as a starting point, so that we can learn from the experience and figure out exactly how they can be expanded further.
So who’s with me?
*Yes, I’ve tried to suggest various principles, such as the concept of implementing stricter funding rules for new benefit accruals and keeping existing rules for existing benefits, to avoid burdening plans which are well-funded according to those current rules. But that’s a bit of a tangent.
**Why do the “international unions” oppose this plan? There is indeed a provision that allows for slower progress towards full funding for the existing plan if a union switches to a “composite plan” for the future. In addition, these new plans don’t have PBGC protection against insolvency. Those objections are short-sighted, and, to the extent they’re based on misplaced confidence in getting the “whole loaf” from Congress, rather than half-a-loaf in terms of a bailout which would eliminate the need for cuts, misguided. But, again, a tangent.
As always, you’re invited to comment at JaneTheActuary.com!