From December of 1987 to March of 2000, we had the longest bull market in history, with a gain exceeding 580%. New York Times, March 5, 2017. But those who keep an eye on their retirement plans are painfully aware of financial crises which decimated investment accounts after the turn of the millennium. In the “dot-com crash” of 2000-02, the NASDAQ dropped over 75%. Then the Great Recession of 2008-09, called the worst global recession since World War II, presented a broader and more severe economic decline.
Workers rely on the progress and stability of the marketplace as a major arbiter of the financial picture of their retirement years. But commonly there are few guarantees in a retirement plan. Traditional retirement devices are subject to ebbs and flows of their involved investments, and the expert money managers in the marketplace repeatedly tell us that “past performance is not an indicator of future results.” In an IRA investment, the individual may have vast discretion in the choices and strategy over time, as each of us gives thought to what we believe the return “ought to be” at our target retirement age given the patterns in the marketplace and our particular investments. There is no promise from your broker, and not only the uncertain market but unforeseen events in life can mess up your retirement. People may make poor IRA investments or borrow against their account due to unexpected medical expenses, devastating unemployment, debt obligations, home and auto repairs, vacations, and a multitude of other events, and there goes the nest egg.
Employer-paid 401(k) Plans, called “defined contribution plans,” generally perform better than individual IRA accounts. They may be managed by the best and brightest of investment experts, with a diverse plan containing both cautious and aggressive fund categories to maximize the employees’ retirement future and protect against market volatility. We all look at those accounts to project what we “ought to have” for our future retirement, but just like an IRA the guarantees are limited. The most insightful, the most highly educated, the most cautious financial advisers in control of employer contributions will again warn you that you cannot rely on past results. You don’t know for sure what that account will be worth at the time you need it, and 401(k) administrative expenses are typically high compared to the age-old union pension approach a defined benefit plan.
There are different ways to trade the notion of “ought to know” for the apparent certainty of “need to know”. FDR formulated the Social Security retirement benefit for that purpose, to provide certainty for persons who earned their livelihood in the U.S. Unions have negotiated retirement benefit plans for decades which take advantage of an enormous participant pool and a tremendous variety of worker demographics to establish, similar to Social Security, a “defined benefit” in the form of a set monthly payment at the time of retirement. The stream of employer-paid contributions to the fund is actuarially assessed based on decades of history, considering the level of contributions and the average level of the ebb and flow of the retirement fund marketplace, to adopt a specific dollar benefit amount available at retirement for each participant. This approach acknowledges that the marketplace will have bad years, but assumes that over time you can measure the balance of good and bad years, and rely on a huge diversity of funds (equities, bonds, treasury notes, real estate funds, international stocks, currencies, commodities, etc.), combined with constant monitoring and revision by experienced financial industry consultants, to adopt a darned solid guarantee of future monthly payments. Those involved in the administration of defined benefit plans would cautiously point out that there are still uncertainties despite the protections designed to guard against volatility and preserve benefit rates. But nevertheless, to most of us with a defined benefit plan the concept of “ought to be” has been replaced by a promise that it “will be.”
That promise includes the plan’s duty to not needlessly hoard plan funds but instead pay them out; “trustees” involved in the management of defined benefit plans have a pointed fiduciary obligation to assure that net funds are not held within the plan but instead are distributed to the participant beneficiaries of the plan. There is no merit to have a plan excessively over-funded, because that money belongs to the plan participants, and over-funding suggests that the benefit level should be altered upward. The plan has an obligation to “assume” an investment standard of return based on a calculation of the fund’s history over the span of decades, the calculation of future protected benefits, and the ongoing stream of employer contributions, to determine a fair measure of pension benefits. In the good investment years of the 1990s that meant the promised benefit should be raised, and that is what all Unions did.
The AFM-EPFund is overseen by a team of trustees drawn equally from the employers who hire musicians and the unions who serve them. The Union Trustees of the Fund generally come from the most populated and sophisticated Locals throughout the country, with a recent balance of a reputable grassroots musician trustee. This creates a group of trustees who by virtue of their career success are highly qualified administrators who have managed Union resources, health funds, emergency relief funds, have scrutinized various Union pensions governing their staff, and have handled large scale local and national negotiations. Their job is to be cautiously protective of their members’ interests, to retain the best fund managers, to disengage consultants who do not meet standards, and to secure and maximize a promised level of retirement.
Much of the literature reviewing defined benefit programs (e.g., the AFM-EPFund) concludes that they have generally outperformed defined contribution plans (e.g., 401(k), Keogh, profit-sharing) and do not succumb to the variances and vulnerabilities of individual IRAs.1 But the dot.com crisis and the Great Recession of 2008-09 took the breath out of nearly all retirement programs and presented an unforeseen challenge to Union defined benefit plans. In 2007, before the recession, the AFM-EPFund was still overfunded (109%). By 2016 it was severely underfunded (59.7%). Major changes in fund management were required.
The AFM-EPFund has significantly altered its expenses, changed the structure of management of the Fund’s investments, and reduced “unprotected” categories of benefits over the course of the past several years, but like other defined benefit plans your Union pension currently rests in “critical status” notwithstanding the rehabilitation plan which has operated since 2010. That critical status remains despite fiscal year investment returns since 2010 of 32%, 12.9%, 2.2%, 8.8%, 8.3% and (0.1%). The Fund is now in the midst of a good fiscal year, having earned over 7% in the first three quarters and dramatically improved in the last several weeks. But as a result of the 2008-09 setback, the Plan is, without a doubt, significantly underfunded the current rate of contributions and investment returns do not match the promised (“defined”) total future benefits. A recent change in mortality tables, as life expectancy has increased, had a dramatic adverse impact on the amount of guaranteed future benefits. At the conclusion of this fiscal year, after March 31, 2017, a determination will be made as to whether the Plan is in “critical and declining” status and whether the Trustees should apply to the U.S. Treasury to gain permission to adjust “protected benefits” the benefit promise made to you based on the Plan’s 28 year history with an average 7.5% return (the investment assumption) and a stable contribution rate. This assessment of the Plan is a work in progress, if not adjusted this year, then reviewed again the next year.
For most of you, 401(k) plans and IRAs were harshly sucker-punched a few years back, but by their nature they never made a true promise, never adopted a clear expectation of results. The AFM has successfully negotiated new sources of contributions to the AFM-EPFund and is exploring more, and the Fund Trustees have again altered their consultant team and realigned their investment strategies. Based on good faith reliance on market history, and a background of sound management, the AFM-EPFund made a promise to you, and now that commitment is being sharply tested.