A growing number of unions are switching to member-directed money purchase plans and adding 401(k) plans this year, leading industry insiders to see unions as the next frontier in the defined contribution world.
The Asbestos Workers Local 12, Long Island City, N.Y., is in the process of converting its $50 million trustee-directed deferred compensation plan to a participant-directed money purchase plan, said Jerry Market, the plan's administrator. The conversion is set for completion Oct. 1, he said.
And the trustees of the International Brotherhood of Electrical Workers Local 292, Minneapolis, also have decided to change the local's roughly $180 million money purchase plan to a member-directed one.
Other funds that have converted within the past year include the IBEW Local 242, New York, which also added a 401(k) plan; IBEW Local 357, Las Vegas; IBEW Local 43, New York; Sheet Metal Workers Local 28, New York; Operating Engineers Local 30, Queens, N.Y.; and Sheet Metal Workers Local 27, Farmingdale, N.J. The 22,000-member Chicago Carpenters is starting a new participant-directed plan, probably this summer.
"I'm seeing more (member-directed plans) than a year ago," said George Appleby, senior vice president of Independent Fiduciary Services Inc., a Washington-based consulting firm specializing in Taft-Hartley plans.
"One of my theories (for the trend) is because the popular press is forever talking about the markets and everyone had such a great run in 1999," Mr. Appleby said. "I have not sensed that there is a dissatisfaction with the way trustees are running them, just that some of these members are saying, `I'm 20' or `I'm 60, and I have a different objective or risk tolerance.' "
Lots of hirings
The Asbestos Workers' trustees have hired New York Life Benefit Services Inc., New York, as bundled provider. They have not yet selected all of the plan's investment options, although trustees plan to offer a fund that mirrors the 80% bonds/20% equity asset allocation of the trustee-directed plan, he added.
The trustees also have not decided whether members will be able to direct all of their assets immediately or whether the control will be phased in, Mr. Market said. But he suspects members will be given access to 100% of their account assets right away.
Trustees of IBEW Local 292 also selected New York Life as a bundled service provider, but have not yet signed the agreement. No further information was available.
IBEW Local 357 has hired MassMutual for its $150 million trustee-directed plan, which should be completely converted by Sept. 1, according to Gary Silva, chairman of the union's board of trustees.
Between July 1 and Sept. 1, all of the members' assets will be invested in a balanced fund of 50% indexed equities and 50% fixed core bond fund that mirrors the trustees' targeted asset allocation, Mr. Silva said. The balanced fund will be the default investment option for workers who fail to make investment choices, he added.
The plan will have 13 investment options, said Jack Peterson, vice president of Zenith Administrators Inc., the union's Las Vegas-based consultant. In addition to the balanced fund, the investments are MassMutual's core bond fund; a money market fund subadvised by David L. Babson and Co. Inc.; indexed equity subadvised by Deutsche Asset Management; international equity subadvised by HarbourView Asset Management Corp.; small-cap growth subadvised by J.P. Morgan Investment Management Inc. and Waddell & Reed Investment Management Co.; growth equity subadvised by MFS Investment Management; midcap growth subadvised by Miller Anderson & Sherrerd LLP; Oppenheimer's Quest Value fund; and four lifestyle asset allocation funds known.
Many plans that are converting to money purchase plans -- and the Asbestos Workers and IBEW locals are just part of a growing number -- are giving union members several choices, Mr. Appleby said. One scenario is to allow participants to remain in the old plan; or, if they choose the new plan, they can invest in a fund that mirrors the asset allocation of the old plan, as well as a menu of new choices.
Historically, unions have been slow to adopt 401(k) plans. There were only 107 multiemployer 401(k) plans in 1996, the latest data available from the International Foundation of Employee Benefit Plans, Brookfield, Wis. Of these, about half were participant-directed.
About 90% of the estimated $70 billion in assets in Taft-Hartley money purchase plans is in trustee-directed plans, said Tom Reynolds Jr., vice president of Reynolds Securities Ltd., a New York-based consulting firm.
But the balance is rapidly shifting this year, as many trustee-directed plans are converting to member-directed plans, Mr. Reynolds said. He estimates that within five years, 80% of the Taft-Hartley money purchase plans will be member-directed.
"Half my time is taken up with Taft-Hartley plans going participant-directed," said Robert Liberto, vice president of Segal Advisors Inc., New York.
Between 30% and 40% of the firm's 300 Taft-Hartley money purchase plans have converted or in the process of converting to a member-directed plan, Mr. Liberto said.
And the push for converting trustee-directed plans to member-directed ones has come from the union membership.
As soaring stock market returns have made assets in many defined contribution plan accounts skyrocket, union members are clamoring for the same control over their accounts as their non-union brethren have.
"When the market took off, union members were comparing their plans to their (spouses') 401(k) plans," Mr. Reynolds explained. "It was a terrible bond market last year. Guys were getting statements and they were saying, `the stock market did well, and we are only getting 5% or 6%.' "
Members are more confident in their ability to manage their own retirement assets, Mr. Liberto said.
"People have a better understanding about investing; a good percentage of the membership is willing to take a bigger risk than the trustees have," he added.
Trustees also are making the change to lessen some of their fiduciary liability, Mr. Liberto said.
Plans that converted last year generated higher investment returns per participant than trustee-directed plans, according to an informal survey, conducted by Reynolds Securities, of 10 plans that switched within the past two years. Participants in member-directed plans earned between 16% and 18% in 1999, compared with trustee-directed plans, which earned between 7% to 8% last year, he said.
"The reason (for the discrepancy) is when trustees are managing funds, they are doing it for the whole membership; the 60-year-old plumber and his 19-year-old apprentice," Mr. Reynolds explained.
For example, members of IBEW local 357 asked for the conversion, in part, because of the plan's poor rate of return. Last year, the trustee-directed plan returned less than 1%, Mr. Silva said.
"Most other funds averaged 12% or 14%," Mr. Silva said. "There were a lot of requests from members to manage their own money."
In March, trustees polled the members on whether they wanted to switch to a member-directed plan; the response was 4.5-1, Mr. Silva said.
It's common for union locals that are converting to member-directed money purchase plans to add 401(k) plans at the same time, Mr. Appleby said. Because these 401(k)s typically don't have employer matches, all that needs to be collectively bargained is whether the employers are willing to deduct employee contributions from paychecks, Mr. Appleby explained. And the investments in both plans usually mirror each other.
However, the addition of 401(k) plans is very recent, Mr. Liberto said. "There's been a lot of activity in the past six months but not before that. It's been problematic because it requires employers to make deductions on pre-tax basis, which requires more bargaining on the part of the union."
Many IBEW locals have put in 401(k) plans, he said.
Some plans are giving their members control over their investments gradually. This year, the leaders of a few unions initially are mapping all of the money to balanced funds that mirror the investment arrangements in the trustee-directed plans, Mr. Reynolds said. This is for older members who want things to stay the way they were. But members can move their money into other investment options in the plan as they feel more comfortable.
Some plans are limiting how freely participants can move into the other investments because the trustees don't think members have had sufficient education to make wise investments. For example, one plan allowed members to direct only 50% of their assets when it switched to a member-directed plan earlier this year. In August, they will be able to direct another 75% of the remaining trustee-directed assets. And each year hereafter, trustees will decide when and by how much this percentage will be increased, Mr. Reynolds said.
Specific units set up
Many service providers are trying to catch the wave of this latest trend and setting up units specifically for it, he said. Among the biggest players are New York Life, CIGNA, INVESCO, Putnam Investments and MassMutual.
And recently, Principal Financial has made a big push into the market, dedicating significant staff and resources to it, Mr. Liberto said.
"We're pursuing this as a real market," said Tom Clough, president of New York Life Services LLC, Norwood, Mass.
Mr. Clough said he expects that in the next couple of years, 65% to 70% of union deferred compensation plans will convert to member-directed plans.
"And all of them seem to be sizable plans with a minimum of about $30 (million) or $40 million," Mr. Clough said.
There is a growing interest on the part of trustees, said Frederick C. Castellani, senior vice president and head of MassMutual Retirement Services.
But he added: "I don't think it is a groundswell yet."
Right now, MassMutual runs about 100 self-directed Taft-Hartley plans and about 50,000 member accounts with roughly $1.5 billion in assets, Mr. Castellani said. Before about 18 months ago, very few plans made the change, he said.