We are seeing the end of the pension system
as we knew it. Company specific defined benefit pension plans are collapsing all around us as the companies go bankrupt or
the plans are becoming obsolete as the companies phase them out and replace them with 401k style plans for new employees.
Defined benefit plans began to show the first cracks four decades ago with Studebaker's demise in
1963 when the bankruptcy of a major auto manufacturer and a major Midwest employer cost many thousands of workers their jobs
and many workers most of their pensions. That led to the Employee Retirement Income Security Act (ERISA) of 1974, which was
supposed to be the answer to pension reform. To that I answer back: United Airlines, US Airways, Delta Airlines, Bethlehem
Steel, LTV, Worldcom, Enron and other defined benefit pension plans that have since vaporized. Currently working are
a number of public sector pension plans about to go down in flames, and of course, the real Godzillas, General Motors
and Ford, which are in play as I write this. To check out the gory details, I highly recommend reading The End Of Pensions by Roger Lowenstein, October 30, 2005, New York Times. It helps to be familiar with the basics, i.e.
the classic company specific pension plan and its current difficulties, to discuss the finer points of my
union sponsored pension plan. This NYT article does an excellent job laying down the historical context and outlining
the current specifics.
My union defined benefit pension situation is fundamentally different
than the company specific examples cited above. As a participant in a union sponsored plan, I don’t have to worry about
the defined benefit pension plan being part of a corporation’s or a private company’s financial structure,
hostage to the fortunes of the company. Instead it exists independently of the employer, for the benefit of and at the direction
of the participants, under Union Trustee management. Properly managed, my defined benefit plan should be able to meet any
future obligation or contingency.
But my defined benefit pension situation is also fundamentally similar
to the company specific examples above. The first large scale American defined benefit pension plans were intended as
a means to provide for post Civil War military veterans and their widows. Later, pensions were extended by legislation
and collective bargaining to cover retirees and their spouses in public and private industry. The traditional 65
years of age retirement threshold was about the midpoint of the mortality of the original retiree groups in the original plans.
With half the participants already dead and the balance expected to be largely reduced within 5 years of the retirement date,
the defined benefit plans were easy to plan and reserve for. They have carried this basic structure and the original assumptions
to date. Nowadays though, because of markedly longer lifespans, plans have to deal with early and long retirements and the
possibility that many of the retirees and survivors may be drawing from the plan for longer than they were contributing. The
cost per retiree and survivor can be many times what the original contribution was. This makes successful management of the
plans more dependent on consistent successful investment and continued and increasing contributions and less dependent on
the simple custody of funds at saving account rates. That’s bad for the plans and therefore that’s bad for me.
However, my defined benefit pension plan will pay only a fixed amount per month on my retirement, with no cost of living
allowance. That defines and fixes in part the plan’s liabilities and means that the longer I live, the greater
the rate of inflation, and the greater my need for the money, the less significant my pension payment will be to the plan
and to me. That’s good for the plan and bad for me. But, by the bylaws of my Union, all the other retirees and I retain
voting rights. If and when there are enough of us in dire enough straits, we could attempt to restructure the pension plan
to greatly increase the funding, pay out to retiree's at a non-sustainable rate, and create a worker/retiree division
of the union. That’s bad for the plan and ultimately bad for everybody. Eventually Union pension plans may fall prey
to the same forces that are felling the company specific plans. I see a trend here. The trend is that it seems to be bad for
me regardless of whether it is good for the pension plan or not. But, there’s two answers to all this potential darkness
and despair. One is to make sure that the defined benefit plan is administered rigorously. More about that elsewhere
on this site or in my blog. The other answer is the defined contribution 401a plan.
contribution plan is a pretty damn good answer if everything works out right. I save and earn by investment what I need in
my old age, it stays mine once I book the contribution, regardless of any demands (short of taxes on withdrawal), and properly
managed and invested, it can meet my needs in the face of inflation and a long retirement. It’s the "works out
right" and "properly managed and invested" that has been the problem. As documented elsewhere on this web site,
my primary union defined benefit and defined contribution plans lost a lot of money between 2000 and 2003 and markedly underperformed
during the period after that. I believe both funds also markedly underperformed prior to that period as well as shouldered
an unacceptable amount of opportunity risk during that time. Apart from the ongoing disaster in the defined benefit and
contribution plans' returns, I had no idea what the proper level for funding was for the 401a, the only funds available
to me in the 401a were losing me money big time, and the managers were drawing a very nice fee for mailing it in, putting
me deeper in the hole. Luckily for me, my wife and I are participants in two common stock IRA plans, a trading account, and
three mutual fund IRA plans as well as my two Union 401a plans. In the process of getting my IRA and trading accounts on track
after the dot com meltdown, I developed a body of knowledge and the tools to figure out what was going on once I got around
to addressing the union 401a defined contribution plans. Over a one-year period starting in late 2003, I repeatedly expressed
my concerns about the 401a plan and the defined benefit plan to the Union Trustees and the need for them to immediately address
those concerns. I was responsible for starting theTrustees down the road to the almost complete overhaul of both
the defined benefit and defined contribution plans. Once the new mutual funds were available to the 401a plan in late '04,
I started to make back the money lost by the previous poor management of the plan. Nothing here and now will ever replace
the lost opportunity of the 90's and allow me to recoup all the losses of the dot com downturn. I'm going
to be left with a much poorer retirement than I could otherwise have had, but I was able to push fixing the
401a it while it was still fixable and while it could do me some good.
So from there it was
only a short step to here; I've set up this web site and I'm sharing what I'm doing with my 401a plan with other
members of my union. I already do 90% of the work anyway. I use Fund Alarm tables to track the relative and absolute performance
of the funds in the 401a plan Vs the mutual fund universe. I use charts to track the relative and absolute performance
of the funds against each other. And I use the charts and an Excel spreadsheet that I developed to allocate and track the
money that I have at work in the various 401 mutual funds. From there, posting on this web site is only a small additional
step. I offer information sources and an example of how I manage my 401a plan. This information is posted here for
any union member that wants to take advantage of it. So far, so good.
Hopefully many brothers and sisters will
be taking advantage of what I’m doing here with my 401a. The charts and tables show you the framework and
the COFGBLOG details the thought processes and concerns that drive my 401a management decisions. Regardless, I've made available
the tools and information necessary to determine what is really going on with your 401a pension plan and to manage it appropriately
by and for yourself if you choose to do so.
Pretty cool, Huh?
Do you have questions or want more information? Email me using the form below....