Multi-employer benefit plans, also known as Taft-Hartley plans, have a primary mission which is to protect their members’ benefits and have those benefits available to them when required. While, in the case of retirement plans, managing those plans for investment growth is important, but protecting benefits is paramount. Even when professionals such as investment advisors and third-party administrators are engaged, plan trustees still retain a responsibility in this area. It is therefore essential that they understand what key plan metrics reflect sound management.
How to Assess a Plan’s Health
Graystone Consulting outlined some key parameters in evaluating a benefit plan’s health in its “Taft-Hartley Plan Fundamentals: What Trustees Need to Know About Building a Healthy Plan”. It notes that contributions must be made by employers participating in the plan at agreed upon frequencies and amounts which are commonly based on the number of hours worked by eligible employees. As for retirement plan assets, the contributions are invested with the goal of generating returns that meet or exceed the discount rate and considers the plan’s risk and liquidity limits. Lastly, distributions of benefits must reflect regular payments made to plan participants who are retired, disabled or eligible in another way.
In addition to meeting these parameters, Taft-Hartley plans must also maintain a healthy funding status which is a measure of a plan’s assets viewed in the context of the future benefits it will need to pay. To calculate a plan’s funding status, the value of its assets is divided by its liabilities, which indicates whether the plan is fully funded or underfunded. While making this determination may seem to be a cut and dry calculation, there are so-called plan funded status zone certifications which have been established by Congress. These zones drill down further a plan’s funding status considering, for example, is it is above or below 80% funded, as well as forwarding-looking assumptions such as if the plan is expected to realize a funding deficit in the next six years. After considering these factors, a plan may be found to be critical nor endangered, endangered, seriously endangered, critical or critical and declining. Depending on the findings, an improvement plan may be warranted that includes increasing contributions or other measures that will help improve its funding status.
How to Determine a Plan’s Discount Rate
A plan’s discount rate is used to indicate what rate of return it must achieve on its investments to meet its obligations to its beneficiaries, both current and future. An actuary determines a plan’s discount rate after considering its expected return on assets over a period of 20 years or more. This professional performs a liability analysis based on various market factors (i.e., asset class returns, inflation, interest rates and wage growth) and plan-specific demographic considerations (i.e., contributions, withdrawal rates, retirement activity and mortality rates). From there, the actuary calculates the current value of expected benefit payments referred to as discounts, (incorporating the effects of compounding interest, reinvestment, and other inputs) to determine its liability, and ultimately to calculate the discount rate. This discount rate is then used by the investment advisor as a guideline as to how much money the plan currently has and will need to attain the level of return each year to meet its benefit obligations.
Fiduciary Responsibilities of the Investment Advisor and Trustees
From there it is the role of the investment advisor, an independent fiduciary to the plan, to develop and implement a sound investment strategy which reflects both market conditions and non-market conditions such as the plan’s funded status, union preferences, industry/workforce dynamics, PBGC premiums and other fees, cash flow, plan age, and liquidity needs, etc.
Plan trustees, who also hold fiduciary responsibilities, should carefully and regularly monitor the performance of their plan’s portfolio to make sure the plan is in position to meet its investment targets.