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Restitching the union label

More and more Taft-Hartley retirement plans are allowing members to make their own investment choices.

Next February 3,000 members of the International Brotherhood of Electrical Workers Local Union 369 in Louisville, Kentucky, will be able for the first time to choose the investments in their defined contribution retirement plan. Putnam Investments, the plan provider, will offer a roster of 13 stock, bond and money market funds. For the past 25 years, trustees of the plan, whose assets now total $120 million, have been making the investment selections.

"This is a monumental change," says Edward Blake, chairman of the local's board of trustees. Members have never before had such autonomy in controlling their savings plan assets. (Like most Taft-Hartley plan boards of trustees, Local 369's is composed of an equal number of labor and management representatives.) More unions are following in the footsteps of Local 369, and employers, whose contributions generally aren't affected by the switch, aren't standing in their way.

Since the creation of the 401(k) in 1981, corporate employees have chosen their retirement investments from rosters of funds selected by their plan sponsors. But union workers covered by defined contribution plans have not traditionally enjoyed that freedom.

In part, that's because defined contribution plans are much less important to union workers' retirement. The vast majority of workers covered by Taft-Hartley plans (the name refers to the 1947 legislation that authorized collective bargaining agreements) are participants in defined benefit plans. Assets in Taft-Hartley defined benefit plans currently total $380 billion, compared with $40 billion in defined contribution plans, many of which were designed as supplements to defined benefit programs.

The unions' defined contribution plans are often inflexible. Until 1995 San Leandro, California­based Teamsters Local 853, for instance, invested all its defined-contribution-plan assets in guaranteed investment contracts. "Our 20-year-old members had exactly the same investment portfolio as our 60-year-old members," recalls Rome Aloise, secretary- treasurer of Local 853, one of the largest multiemployer plans to make the switch to member direction so far. In all, it has about $215 million in assets and about 21,000 participants.

The impetus to make these programs participant-directed has come gradually -- much of it through word of mouth from spouses and friends who enjoy the freedom of choice offered by their corporate 401(k) plans. In 1994 IBEW Local 3, based in New York City, became one of the first large Taft-Hartley defined contribution plans to abandon trustee direction. The trend gathered steam during the 1990s.

But when the market peaked in March 2000, fewer than half of the 390 Taft-Hartley defined contribution plans with more than $20 million in assets were participant-directed, notes Frank Porcelli, who heads up sales and client services for defined benefit and defined contribution plans at Putnam. "The momentum toward self-direction was strong in 1998 and 1999," Porcelli says. "But trustees got cold feet in 2000."

Of the dozen plans that Putnam saw delay their switch to participant direction in early 2000, six have since decided to make the move. Interest has revived along with the U.S. stock market.

Louisville's Local 369 decided to make the switch partly in response to pressure from its members. "Initially, we considered opening control only to participants over age 50, but that would have discriminated by age," says chairman Blake. In addition, the union's board of trustees turned over within the past two years. "Three of the four management trustees are new," says Blake, "and they were open to the change."

In a selection process that concluded in early August, Local 369 chose Putnam as its provider, largely because of the firm's fees, which were about 10 percent lower than those of its closest rival, Blake says. The local also appreciated the provider's flexibility in offering nonproprietary investment choices -- six of the 13 funds aren't Putnam products.

Putnam ranks as the leading provider of defined contribution retirement services to Taft-Hartley plans. It claims almost 15 percent of the $40 billion market, with assets of about $5.7 billion as of June 30. The No. 2 firm, with assets of about $3.1 billion, is McMorgan Asset Management, owned by New York Life Investment Management. Other major players: Cigna Cos. ($3.43 billion), Vanguard Group ($2.9 billion) and Pimco ($990 million).

Trustee-directed plans generally pay their providers about 40 to 50 basis points for all services, says Robert Liberto, a consultant with Segal Advisors, which provides services to Taft-Hartley plans. By contrast, member-directed plans are paying about 70 to 90 basis points. Providers charge that premium to offset increased spending on participant education and communication.

But providers earn more than respectable 15 to 20 percent profit margins on both participant-directed and trustee-directed Taft-Hartley defined contribution plans, versus margins of 5 percent for 401(k)s, according to Sterling Resources, a Paramus, New Jersey­based consulting firm.

Says Putnam's Porcelli, "Our Taft-Hartley margins are generally better than on corporate plans." One reason: Assets are propped up by the fact that organized labor negotiates the level of contribution to these plans in their collective bargaining agreements, which generally run for three years. What's more, union membership is almost always a lifetime commitment, so participants don't leave the plan when they change jobs, as most employees do with 401(k)s.

Unlike those of 401(k)s, contributions to union plans are entirely paid by employers. The rate is a specified percentage of a worker's hourly wage. At Local 369, inside journeyman wiremen who earn $24.75 per hour, or $51,480 per year, receive annual employer contributions of $7,420 to their defined contribution retirement plan.

For the most part, Taft-Hartley plans do not allow employee contributions. Nor do they allow workers to borrow against their 401(k) accounts.

And, of course, they offer no special protection in a bear market. Last year assets in Local 369's plan declined 6 percent, following a 5.5 percent loss in 2001. As stocks roared back this year, the plan was up about 4 percent through August.

Web feat

The Vanguard Group has had a Web site for its retail customers since January 1995. But not until July did the money manager have one for sponsors of both defined contribution and defined benefit plans, providing employers with new ways to oversee their investment managers. Included on the site are analytic tools for tracking performance as well as research from AllianceBernstein Institutional Investment Management, Wellington Management Co. and others.

Vanguard joins a growing roster of asset managers who are providing Web-based advice for the sponsors of 401(k)s. Among them: Fidelity Investments, ING Investment Management and New York Life Investment Management.

Most are extending these services to plan sponsors at no extra cost, covering the expense from investment management fees. Vanguard's Martha Papariello, who oversees the Institutional Investments Group, won't specify the firm's costs, but says that the funding to get it going was "significant."

NYLIM was one of the first in this field, launching its Portfolio Complete service a year ago. Unlike Vanguard, Fidelity and CitiStreet, NYLIM did not develop its product in-house; instead it relies on an alliance with Morningstar.

With this system, plan sponsors can choose among three approaches to monitoring their investment managers -- two of which are so comprehensive that Morningstar becomes a co-fiduciary. In the most complete versions, Morningstar puts together a demographic profile of the sponsors' participants and then tailors the investment options to that profile. In the first version, known as "the complete solution," Morningstar actually recommends investment options, while in the second version, the "approved solution," the advice-givers suggest categories of funds, indicating the choices within each category. In the third iteration, the "flexible solution," which comes without a sharing of fiduciary responsibilities, Morningstar recommends a list of funds.

Morningstar's research tools are available to track the performance of those fund managers. The tools evaluate whether a money manager is guilty of style drift and rates the fund's performance against benchmarks.

Several months ago Morningstar inked a deal with ING Retirement Services, providing the money manager with a similar customized package. -- J.S.G.