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Union Workers, Don't Overlook Your 401(k)
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By Clifton Linton
Senior Writer, mPower |
Participating in your
union-sponsored 401(k) plan could mean the difference between buying a used pop-up camper
trailer or a luxury RV when you retire.
The traditional defined-benefit
pension plan is still the retirement benefit of choice for unions. But over the
past few years a growing number of multi-employer unions have started adding supplemental
defined-contribution savings plans to their retirement benefits, some of them 401(k)
plans.
"It gives workers additional
opportunity to save for retirement," said Shaun O'Brien, senior policy analyst with
the AFL-CIO.
While many pension plans will provide
adequate retirement income, "a number of existing ... plans won't provide all the
needed income at retirement," warned Roger King, attorney and partner with Jones,
Day, Reavis & Pogue.
If you're a union worker, you
shouldn't overlook this benefit.
Taft-Hartley, or Many Employers, One Plan
Benefits like 401(k) plans are not
automatically provided to union workers. They must be negotiated between unions and
employers.
In single-employer situations, it's
fairly simple to negotiate and administer a 401(k) plan. The employer's benefits
department manages the paperwork and signing up for the plan is a one-time occurrence for
the union member.
In multiple-employer situations, where
union workers regularly shift among employers as jobs start or finish, it's more
complicated. The Taft-Hartley Act provides rules on how unions in this situation can
negotiate and administer benefits.
Retirement benefits for multi-employer
unions are administered by a trust overseen by trustees from both management and labor.
This arrangement works fairly well for employer contributions to standard pension plans,
but it gets complicated with 401(k)s. Among other administrative problems, participation
in a 401(k) is voluntary, so monitoring enrollment is difficult. Also, workers need to
enroll at each new job site and choose how much to contribute each time.
Rising 401(k) Interest
To date, the most popular supplemental
plan offered is an "annuity plan," said Peter Zummo, vice president of
Taft-Hartley sales with Diversified Investment Advisors. Despite the name, these plans
don't always include actual annuities. They are a type of 401(a) plan in which the
employer makes a contribution on behalf of the worker and/or the worker can make after-tax
contributions. In about 60 percent of these plans, trustees control the investments. Union
members call the shots in the remaining 40 percent.
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| "I
get the impression from the youths coming into the trades that they are more comfortable
with things like 401(k) plans, because their spouses have them." |
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| — Joe
Vater, attorney and partner with Meyer Unkovic ' Scott, in Pittsburgh |
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But now, 401(k) plans
are likely to be the hot new offering by unions, because they allow employees to
contribute pretax money directly from their paycheck, choose their investments, and
possibly receive employer-matching contributions. Only about 150 multi-employer 401(k)
plans currently exist, estimates Chris Sonner, Taft-Hartley relationship manager in the
retirement and investor services group of the Principal Financial Group. Their use is
likely to grow. "There is a lot of interest," he said.
The interest comes mostly from younger
workers, said Joe Vater, a Pittsburgh attorney and partner with Meyer Unkovic & Scott.
"I get the impression from the youths coming into the trades that they are more
comfortable with things like 401(k) plans, because their spouses have them," he said.
Supplemental 401(k) plans are common
among higher-paid trades in the construction, trucking and maritime industries, where
workers have more income to save. In the retail industry — another field where
multi-employer unions operate — wages are often so low that few workers think they
can spare the money for a 401(k) contribution.
Limits
Compared to plans offered to non-union
workers, union-sponsored 401(k) plans tend to offer fewer features and
require more paperwork.
For example, many 401(k) plan trustees
have decided to limit loans and hardship withdrawals because they believe this money
should be saved for retirement, and not tapped early for normal expenses like a car
payment, said Joyce Mader, a union-side labor lawyer and partner with O'Donoghue &
O'Donoghue.
High administrative costs and tricky
regulations are leading reasons these plans haven't caught on faster among unions, Mader
said. For instance, workers in multi-employer plans must fill out a new 401(k)-election
form at each new job if they want to contribute, just as they must submit a new W-4 form
for the IRS. Employers will be diligent about asking for the IRS form, but won't
necessarily push the 401(k)-election form. Workers may not think to ask, because not every
employer they work for will have signed on to offer the plan.
The 401(k) industry is looking
hungrily at this untapped market. "As more (providers) become familiar with
multi-employer 401(k)s this issue will work itself out," Mader said. So, if you're a
union worker, be sure to check if a new employer has already signed on to the 401(k) plan.
Advantages
It's probably worth the hassle to
check because a big advantage of saving in a 401(k) plan is the tax benefit.
Your contributions are tax-deductible and your earnings grow tax-deferred. You won't have
to pay taxes on the money in your account until you withdraw it.
A 401(k) plan is a good way to build a
disciplined savings program. Because your contributions are deducted from
your paycheck, you don't have to remember to save the money. And in many cases you may not
miss it.
Michael Romero is a 30-year old
apprentice plumber with San Francisco-based Local 38 of the United Association of
Journeymen and Apprentices of the Plumbing, Pipefitting, Sprinklerfitting Industry of the
United States and Canada. Until he completes his apprenticeship, he's only allowed to
contribute the minimum of $1 an hour to his union's plan. You'd figure he couldn't afford
the contributions, given the Bay area's high living costs. "I don't notice it. It's
such a small percentage (of pay) it doesn't affect the way I live," he said.
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| "It
gives workers additional opportunity to save for retirement." |
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Shaun O'Brien, senior policy analyst with the AFL-CIO |
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Another advantage of this plan is it's
a way to build additional retirement savings. Financial planners estimate
you should expect your retirement living expenses to equal at least 70 percent of your
salary the last year you work. If your pension and Social Security won't cover that —
or you want a more-generous retirement — 401(k) savings can help bridge the gap,
Diversified's Zummo explained.
A 401(k) plan can also be a boon if
you work more than the minimum needed to qualify for pension credit. Suppose
your union requires you to work only 1,000 hours a year to get credit and you work 2,000
hours. You won't get get an additional year's credit because you worked an extra 1,000
hours, but you can take advantage of those extra hours by saving from those wages in a
401(k) plan. "A person working (that much) would be better off in a 401(k)
plan," Vater said.
Federal rules permit 401(k) plan
participants to start withdrawing their money without penalty at age 55 if they take early
retirement. Early retirement is a key issue for many union workers who are
physically ready to retire by their mid-50s. Many pension plans start paying benefits at
this age, but workers may find their lifestyle crimped if they don't yet qualify for
Social Security benefits. The withdrawals from a 401(k) plan can provide a bridge, King
said.
A last advantage of a 401(k) plan is
that since you direct the investments, you can select the amount of risk
appropriate for your own situation. Many pension plans are invested to provide the best
return for the entire membership on average, but that may not be appropriate for you. If
you have 20 years until retirement, you might want more aggressive investments that
provide potential for more investment growth. Conversely, when you are closer to
retirement you might find the pension-plan investments too aggressive. To compensate, you
can adjust the risk in your 401(k).
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The information provided here is intended to help you understand the general issue and
does not constitute any tax, investment or legal advice. Consult your financial, tax or
legal advisor regarding your own unique situation and your company's benefits
representative for rules specific to your plan.
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