The PGA Tour's lucrative retirement plan used to be the best-kept secret in sports.
As the tour season heats up and practice rounds begin for this week's Masters Tournament, a series of stories in Golfweek's March 24 issue has outed the tour's plans as the best in professional sports, poised to make millionaires of even mediocre players, provided they start early and play consistently into their 40s.
Former PGA Tour Commissioner Deane Beman and tax attorney Victor F. Ganzi designed the 457 deferred compensation plan as a way to provide for tour players, many of whom competed all their lives and had little left at retirement to show for it.
"It's about sheltering the original contribution from taxes and then the miracles of compound interest without taxes over an extended period of time take over," Mr. Beman said in an interview with Pensions & Investments.
The PGA Tour adopted the plan, which rewards players based on the number of times they make it into tournament final rounds, in 1983, funding it with a couple of million dollars from tour revenue. Three years ago, the tour added two more performance-based plans - one that compensates players for finishing among the top 70 players in each of three season segments, and one that offers a bonus for finishing in the top 150 on the year-end tour money list. The assets of the three plans total $200 million.
Together, it can all add up to sizable nest egg. Based on PGA Tour figures, Golfweek estimated a 26-year-old player who starts his tour career this year, plays for 17 years and averages 130th on the tour's money list, will have $34.1 million in deferred compensation at age 60. If he averages 75th on the money list, the amount grows to $42.6 million. Averaging 30th earns him $78.6 million.
Marquee players earn even more. Tiger Woods, for example, could earn $300 million if he becomes fully vested in the tour retirement plan, according to Golfweek.
Those numbers assume a 5% average increase in plan funding each year by the PGA Tour, an 8% average annual return on player investments, and not paying benefits until players reach age 60.
(Full vesting in the original plan occurs after playing in at least 15 official events for five or more years. To vest in the segments plan, a player must either play in 100 events, play each event on the tour calendar at least once, or increase his average playing schedule by three events. Vesting in the money list plan is automatic as soon as a player earns a contribution.)
Mr. Ganzi developed the structure of the original plan based on a similar, but less-funded, plan he drafted in 1982 for the Ladies Professional Golfers Association.
Here's how the PGA Tour retirement plan works: Players meet the various incentives and the tour puts money into the players' retirement accounts. Tour sponsor Charles Schwab Corp., San Francisco, administers the accounts. Last year, 201 PGA Tour players participated in the original retirement plan, said Ron Price, senior vice president of finance and administration. In 2001, he expects even more players will participate.
The plan is participant-directed, with players selecting from among the SchwabPlan mutual fund investment options approved by the PGA Tour. Right now, tour players can choose from among 12 investment options ranging from equities to fixed-income to cash accounts, said Charlie Zink, executive vice president and chief financial officer for the PGA Tour.
"We try to provide products that cross the spectrum of volatility and risk," Mr. Zink said.
Most PGA Tour players have their assets split 70% in equities and 30% in fixed income and cash, Mr. Zink said.
The same holds true for Senior PGA Tour players, even though logic would suggest their investment strategy would be more conservative. The Senior PGA Tour has a similar, but separate plan. "They still like to go for the pin," Mr. Zink said.
Players have the option of managing their own accounts, or using a Schwab adviser. Tour players not only get access to SchwabPlan's investment options, but through an exclusive agreement with the tour, also get educational programs and other services.
"Everything that comes with the bundled-type offering is also offered to the PGA Tour players and employees, with some other exclusive services," said Lance Berg, a Schwab spokesman.
For tax reasons, the plans all must be performance-based, Mr. Beman said, and they can cover only active players, not former players, because deferred compensation can only be for work done on a current basis, not for work done in the past. Partly for this reason, the Senior PGA Tour started the plan for older players.
PGA Tour players are considered independent contractors, not employees, because the tour does not mandate how often they work or what equipment they use, nor does it pay players by the hour or week or withhold income taxes or FICA payments.
"They're in business for themselves," Mr. Beman said. "They're not eligible for a pension plan under any traditional fashion. They couldn't be (PGA Tour) employees and get remuneration the way they do and still have the PGA Tour remain a 501(c)6 organization."
Added Mr. Zink, "If they were employees of a not-for-profit organization, there would be significant limits on what could be contributed on their behalf. It's in (the players') best interest to be independent contractors so we can set up these 457 plans and not have them subject to limits."
The plan is non-qualified, which can be good and bad, Mr. Beman said. On the good side, it means there is no limit on the amount of tax-deferred money the tour can contribute (1986 IRS tax reform laws that set contribution limits specifically grandfathered the PGA Tour plan). But assets of non-qualified plans are considered part of the organization's general assets and can be subject to lawsuit settlements.
Mr. Beman said tour players benefit more from a non-qualified plan. "If I were a player, I'd rather have $30 million in a (non-qualified) plan than have $1.5 million and have it (qualified)," he said.
Contribution way up
The plan sponsor's contribution has skyrocketed. Prior to starting the original plan in 1983, the tour spent 98% of its revenue on prize money, with the rest going to charity, Mr. Zink said. By 1990, the tour was contributing $2.4 million to the original plan on behalf of its players. In 2001, the tour expects to contribute $27 million to all three plans, $12 million to the cuts-based plan, $9 million to the bonus plan and $6 million to the incentive plan, he said, adding the tour is working to increase the amount it sets aside for deferred compensation and reduce what it pays out in prize money, to the chagrin of some of the less successful players.
"We're discussing that as part of the overall resource allocation plans for the tour," he said. "I would expect it would continue to increase on the deferred compensation side. We have broad membership, and we have to look at the interests of all the members. Some who have been successful and have a lot of money would like to see a larger portion going to deferred compensation, and there are others who would rather have the prize money."
The money to fund the tour retirement plans comes from revenue the tour takes in through a variety of sources, including a four-year, $600 million television contract, tournaments and licensing fees.
Some, including Tour Players Association President Danny Edwards, told Golfweek the plan's payout projections aren't on par with reality, and that young players shouldn't count on seeing so much green after their years on the tour are through. They said the plan's most optimistic estimates are for players who make it to the final rounds of 19 tournaments a year until age 45, and then 12 tournaments a year after that until age 60, and only a few players will manage that. Only one player, Hale Irwin, has managed to make more than 12 cuts a year since turning 45. He made 19 cuts at age 49.
Others say the 8% annual return assumption is too high. The average assumption among pension funds is 9.1%, consultants said.