The backbone of the union retirement plan market - defined benefit plans - is getting some company.
Union and Taft-Hartley trustee-directed annuity plans increasingly are being converted to self-directed plans, some of them 401(k)s. The reasons: the allure of a thriving stock market and the quest for individual selection.
Industry experts predict the trend will continue, as pressure from younger union members begins to influence frequently conservative plan trustees.
That would be good news for bundled 401(k) providers.
Some - Cigna Retirement & Investment Services, Hartford, Conn.; Putnam Investments, Boston; Weiss, Peck & Greer, New York; and AmalgaTrust, Chicago - already have established bundled packages for the Taft-Hartley market
"The Taft-Hartley marketplace has gone crazy .*.*. There seems to be a groundswell from the membership who want to decide where their investments go," said Robert Liberto, vice president at Segal Co., New York.
Segal last year surveyed about 250 Taft-Hartley plans and found about 15% had participant-directed plans, he said. Another 15% said they are looking at adding such plans.
Mr. Liberto said he talks to executives from at least one Taft-Hartley plan a week, all talking about adding a self-directed investment plan or converting an existing annuity plan.
Business is booming
"For us, it's a booming business," he said.
He said he is involved with seven searches under way for Taft-Hartley plans seeking to convert to or implement self-directed investment plans, and has completed 12 such searches in the past 12 months. He declined to name the plans.
Not all self-directed plans add a 401(k) immediately, Mr. Liberto said. But shifting an existing annuity plan to self direction is the first step most plans make before implementing a 401(k).
"The movement to 401(k) will be there," said Mr. Liberto.
The $40 million fund of the International Union of Operating Engineers Local 4, Boston, converted first to self-directed annuity in 1993 and then, earlier this year, to 401(k).
Its 401(k) uses six Putnam mutual funds and three lifecycle funds.
William P. Ryan, business manager, said member contributions started in the first quarter. After three months, the plan has a 27% participation rate.
"We have clearly been out front of the pack on this," he said.
"With the improved economy and the fact that younger members like the plan and have less confidence in the traditional pension plan and Social Security, the 401(k) has become popular.
"There is a lot of enthusiasm from the younger members. But, I think, philosophically, unions have tried to offer defined benefit plans. But the changing relationships (between younger members and trustees) over the years means that they will increasingly start to offer self-directed type plans in the future," said Mr. Ryan.
The move by the Taft-Hartley market toward self-directed plans is fairly slow by industry standards. Still, experts claim there is a "groundswell" among members in some plans seeking self-directed supplemental plans in addition to defined benefit plans - the backbone of the union market.
"There is a trend toward it, but it is almost trade specific," said Dave Silk, director of Taft-Hartley services at Putnam.
"There is a groundswell of interest, but the actual number of conversions at this point has been fairly small when compared with the number of requests for information meetings we have received."
He said some unions - such as the operating engineers and electrical workers and those with heavy concentrations of younger workers - have been more active in seeking self-directed annuity and 401(k) plans. Unions with older average work forces have "shied away" from the defined contribution approach.
Bill Huer is president of AmalgaTrust, the trust subsidiary of Amalgamated Bank of Chicago that focuses on the Taft-Hartley market. He said AmalgaTrust recently participated in the conversion of three multiemployer plans to self-direction and is working with a large international union on implementing a new self-directed annuity plan.Alliance formed
The AmalgaTrust Labor Alliance was put together last year to appeal to Taft-Hartley plans interested in establishing self-directed plans.
Under the AmalgaTrust program, Cigna provides record keeping, administration and its multimanager investment matrix and three Weiss, Peck & Greer lifecycle funds. AmalgaTrust serves as the lead marketing force and provides investment education to members.
Mr. Silk at Putnam said traditional trustee-managed multiemployer annuity plans have been heavily weighted toward fixed-income and stable-value investments. As a result, "younger members see 5% to 7% annual growth while the stock market goes up 25% and the younger member sees an opportunity loss.
"That seems to be driving the trend toward self-directed plans."
He said "it is now only a question of time" before the trend to self-directed supplemental annuity plans and 401(k) plans becomes the rule in multiemployer markets.
"It's moving in their direction now," he said. "There is enhanced interest and we expect it to get bigger and bigger in the future."
Sam Gagliardi, senior vice president, Taft-Hartley and multiemployer plans, at Cigna, said Cigna has developed a special multimanager investment matrix for multiemployer plans as part of its bundled package.
Choice, better service are issues
He said self-directed plans are being considered by unions as a way to offer more choice to members as well as a higher level of service than available with defined benefit plans.
Mr. Gagliardi said members are interested in daily valuation, individual account statements and Internet capabilities. Participants, he said, "are taking a much more active interest in their own personal retirement planning.
"There is some groundswell of interest from members. In other cases it is a 'me-too' type of proposition. In others, it comes from members seeing others with defined contribution plans and saying that they want it too," he said.
"It's being considered widely. Originally we thought some trades may move to self-direction more quickly than others, but there is interest among all trades," he said.
He said the pace of bundled and unbundled provider searches in which Cigna has been involved has been increasing. He said last year Cigna was involved in about 15 such searches and already this year there have been between 20 and 25.
Mr. Gagliardi said the 401(k) was not originally intended for multiemployer plans "but as people become more interested in (self-direction) you will see more international unions wanting to move to the 401(k) and then roll it out to the locals."
Cigna has about $3 billion in Taft-Hartley assets under management for 225 funds, of which about 50 are defined contribution plans, he said.