Members of the Allied Pilots Association, which represents 15,000 American Airlines pilots, ratified a four-year contract between the airline and the union under which pilots will see an increase in 401(k) contributions and an immediate pay raise of more than 21%.
The contract also provides subsequent pay hikes each May.
On the whole, the new contract will provide pilots with about $9.6 billion in additional value compared with the prior agreement.
According to documents provided by Capt. Dennis Tajer, spokesman for the APA, as of May 2, 2024, 401(k) contributions to pilots will amount to 17% of annual salary. On May 2, 2025, that figure jumps to 18%.
Mr. Tajer said the current contribution rate is 16%.
In addition, the May 2 dates related to the pay raises and 401(k) contributions will shift to Jan. 1 of each respective year in the event that United Airlines pilots ratify an agreement in 2023.
According to data from Plan Sponsor Council of America, part of the American Retirement Association, in 2021, company contributions to 401(k) plans as a percentage of eligible participants' annual payroll ranged from 4.6% and 6.7%, depending on the number of participants in a plan.
Regarding American Airlines' new 401(k) contributions, Casey T. Smith, president of Wiser Wealth Management, which consults on 401(k) plans for airline pilots, noted that "the major airlines are in the 16% to 18% contribution range," while the regional airline pilots do not have such high contribution rates.
The APA contract will also allow for the creation of a market-based cash balance plan, under which pilots can choose "self-directed participation for excess contributions to qualify as tax-deferred qualified retirement plan contributions."
Mr. Tajer added in an email that "any pilot that reaches the 401(k) maximum will be eligible for the cash balance plan."
Mr. Smith explained that after the global financial crisis "pensions went away for airline pilots, but a non-elective contribution was added to their 401(k) plans."
This non-elective contribution is now around 17% of their income (for the major airlines) added to the 401(k) plan for every pilot, he noted.
For many pilots this 17% plus their own contribution to the plan exceeds the $66,000 401(k) contribution limit.
"The market-based cash balance plan allows for that 17% to be invested and still be tax-deferred rather than it going into their paycheck as it does now," Mr. Smith added. "The plan is a little bit like a pension, but better, in that there's no company risk — meaning if the airline goes out of business, the plan does not go to the Pension Benefit Guaranty Corp., rather the monies are owned by the pilots."
The pilots cannot manage the assets of this plan, he said. "The assets are in a 40/60 mix, with a target of 3.5% to 4% annual return," he added.
Mr. Smith, a former commercial airline pilot himself, oversees $270 million in assets at his firm.
Officials at American Airlines could not be reached for further details.
