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Participating in
your union-sponsored 401k 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 401k 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 401k 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 401k 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 401ks. Among other administrative
problems, participation in a 401k 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 401k
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
401k 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, 401k 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
401k 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 401k plans, because their spouses have
them," he said.
Supplemental 401k 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 401k contribution.
Limits
Compared to plans offered to
non-union workers, union-sponsored 401k plans tend to offer fewer
features and require more paperwork.
For example, many 401k 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 401k-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
401k-election form. Workers may not think to ask, because not
every employer they work for will have signed on to offer the
plan.
The 401k industry is looking
hungrily at this untapped market. "As more (providers) become
familiar with multi-employer 401ks 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 401k plan.
Advantages
It's probably worth the hassle to
check because a big advantage of saving in a 401k 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 401k 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 — 401k
savings can help bridge the gap, Diversified's Zummo explained.
A 401k 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 401k plan. "A person working (that
much) would be better off in a 401k plan," Vater said.
Federal rules permit 401k 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 401k plan can provide a bridge,
King said.
A last advantage of a 401k 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 401k.
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