A new study released June 2 by Groom Law Group has found 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.
According to the Associated General Contractors of America (AGC), the study makes it clear that employees and employers stand to benefit once Congress authorizes the use of composite plans.
“Composite plans are a voluntary approach with built-in guardrails to keep plans on track that would give plan sponsors a much-needed option as they look for ways to provide sustainable lifetime income to participants,” concluded Josh Shapiro, the study’s author. “Our case study illustrates how the key composite plan features can provide greater long-term benefit security than current pension plans.”
Composite plans are a retirement reform designed to provide benefit security through conservative funding principles and early corrective action. Unlike 401(k) plans that typically pay lump sums, composite plans pay all benefits as lifetime annuities, so participants do not need to worry about outliving their accounts and being left without a source of income. While these plans successfully benefit millions of middle-class retirees across the developed world, they have not yet been authorized for use in the U.S.
“Composite plans are not a government mandate, but a voluntary option for trustees to consider as a tool to protect and promote the health of pension funds,” said Matt Aquiline, CEO of the International Council of Employers of Bricklayers and Allied Craftworkers (ICE) in an AGC release. “And composite plans are a dependable and preferable option to evaluate when considering a plan conversion to a defined contribution plan.”
The new study, which was commissioned by a range of employer groups, was designed to evaluate how a composite plan would have performed during two recent economic crises, the downturn of 2008 and the more immediate coronavirus pandemic.
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.
“This new report makes it clear that composite plans offer workers the kind of security and stability that too many traditional multi-employer retirement plans promise but are unable to deliver,” said Stephen Sandherr, CEO of AGC. “Hard-working construction professionals deserve a stable and secure retirement, and composite plans offer a superior path to providing that security.”
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. This greater participation, Shapiro says, will further enhance benefit security for retirees by allowing the plans to stay more financially stable. The attractiveness of composite plans is one reason that some of the largest construction unions support them.
“Composite plans will eliminate the greatest obstacle to our industry’s growth, the disproportionate burden of withdrawal liability,” said David Long, CEO National Electrical Contractors Association. “We can remove this obligation while strengthening the long-term security of the benefits our retirees and electricians earn.”