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The IRS recently approved a unique move by employers and unions in the hospitality industry to replace a 401(k) plan with a new type of traditional pension plan.
For decades, employers have left the pension system in droves and adopted 401(k) plans for their workers. But trustees for a 401(k) plan covering 4,000 members of the Boston-based UNITE HERE! union saw that members weren’t using their 401(k). So the trustees made the move to a new type of pension plan.
“Seventy-five percent of the plan’s members weren’t participating in the 401(k) and we felt the plan was unfair to employees because they incurred all of the investment risk,” Brian Lang, president of UNITE HERE Local 26, told Bloomberg BNA. During bargaining negotiations, the union began pushing for a traditional pension that would reduce this risk and be fair to its members. The union also sought a pension that would address some of the concerns of plan sponsors, which typically object to the costs and risks for them inherent in traditional pensions, said Lang, who is a union-trustee of the pension trust.
The union and plan sponsors in 2012 implemented a new pension design that they believed would be fair to both employees and contributing employers. On July 24, 2017, the trustees received word that the IRS had approved tax-qualified status for the plan. The plan continues to maintain the 401(k) but makes matching contributions only for members who held accounts when the contributions were frozen for new participants.
The new plan design, known as the variable defined benefit, “works well in favor of plan sponsors in that it limits their liability going forward,” George Greene, vice president for labor relations at Marriott International in New York, told Bloomberg BNA. Greene was involved in collective bargaining negotiations over the new plan.
The VDB “is intended to be 100 percent funded,” Jim Stamos, one of the plan’s three employer representative-trustees, told Bloomberg BNA. If the plan dips below a 90 percent funded level, the trustees are “required to do whatever it takes to bring it back to full-funding,” said Stamos, a retired vice president with Omni Hotels and the former dean of Boston University’s School of Hospitality Administration.
Lang said that the new pension was a smart move for the plan sponsors as well as for union members. That’s because there’s a shortage of hotel industry workers in the Boston area and the availability of the pension serves to attract high-quality skilled workers who want to stay at their jobs, he said.
The VDB is attractive to plan sponsors because it “provides a higher degree of employer contribution stability,” Richard Hudson, the plan’s enrolled actuary, told Bloomberg BNA. It’s also beneficial for participants because investment risk is shared by sponsors and participants. In addition, participants can accrue greater benefits based on positive investment returns on plan assets.
The plan includes two separate benefit accrual calculations—a guaranteed minimum floor benefit and a variable benefit based on the investment performance of plan assets. The annual adjustment to the variable benefit is capped at 4.5 percent above the plan’s targeted 5.5 percent investment return. At retirement, participants would be entitled to the accrual calculation providing the greater benefit.
The 5.5 percent expected return is significantly lower than the 7 to 8 percent return that plans typically use. “The lower return expectation gives a higher chance of exceeding the plan’s investment benchmark,” said Hudson, a principal consulting actuary with Cheiron in New York.
If the plan’s funded level falls below 90 percent, the trustees are required to act to bring the fund back to a 100 percent funded level. One of those actions would be to slow down the participants’ annual floor benefit accrual until the desired funding level is achieved, Hudson said. Such a slowdown in floor benefit accruals wouldn’t affect any benefits that members accrued in prior years, he said.
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The IRS determination letter is at http://src.bna.com/reE.
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