Feature Articles
Union Workers Can Use 401(k) to Augment Retirement Benefits
By Clifton Linton
Senior Writer, mPower

 

Since the stock market began its tumble in 2000, every time union member David Moore contributes to his 401(k), his wife asks, "Why do you do this?" and tells him he's "throwing money away."

Indeed, anecdotal evidence suggests that some union members have shied away from saving in their 401(k) plans because they see their balances falling.

However, workers who don't save in their 401(k)s because of worries about investment loss are focusing on the wrong risk.

"The real risk is not losing money -- you can manage that risk. The real risk is not having any retirement savings," said Roderick Crane, vice president and defined-contribution practice coordinator with Segal Advisors, Inc.

That's why Moore, 60, a maintenance worker at a pulp mill in Eureka, Calif., keeps on saving in his 401(k). "I am pouring money into it with the hopes that when (the market) turns around I will be rewarded," he said.

The 401(k) Roof

The 401(k) plan is a defined-contribution plan: the amount you receive at retirement depends on the amount of your contributions and the earnings they generate. A defined-benefit pension plan is funded and managed by the employer. Typically, retirees receive a fixed amount every month, based on a pre-set formula. The bonus: unlike a 401(k),"you can't outlive your (pension) benefit," said John Hotz, deputy director of the Pension Rights Center.

Pension plans remain the primary retirement benefit favored by unions, said Kathy Roeder, spokeswoman for the AFL-CIO. But, a 401(k) plan can be a "powerful supplement," she said.

 

"I am pouring money into (the 401(k)) with the hopes that when (the market) turns around I will be rewarded."
David Moore, 60, union member

 

Union workers should picture their retirement plans as a house. Social Security and a company defined-benefit pension plan provide a firm foundation upon which to build. A 401(k) plan is the roof overhead.

A growing number of unions have bargained to add 401(k) plans to their benefit mix. The percentage of union members participating in 401(k) plans negotiated through collective bargaining agreements stood at 10.5 percent in 2001, up from 7.5 percent in 1996, said the Profit Sharing/401(k) Council of America. (The 2001 figure -- the latest available -- is due to be published in the PSCA's Annual Survey of Profit-Sharing and 401(k) Plans later in September.)

Three-legged Stool

Financial planners commonly liken retirement benefits to a three-legged stool. Social Security makes up one leg, a company pension the second, and personal savings the third. Without these three legs, the stool can easily tip over.

Yet, some union workers don't take advantage of their third leg, personal savings, expecting the first two to carry them through retirement. And some receive an unpleasant surprise in retirement when their pension and Social Security benefits aren't as generous as they expected. Consider that Social Security is designed to provide a limited percentage of current income in retirement. For a 40-year old worker earning $50,000 in 2002 and expecting to retire at age 67, Social Security benefits will cover a little more than 35 percent of today's income. (The percentage is lower for a higher earner.) Pensions, depending on the generosity of the employer, may provide another 40 percent.

If you're a union worker, take a minute to calculate how much income your retirement benefits will provide. The Social Security Administration sends annual statements showing what your benefits will be in retirement. Your union can help you calculate how much your pension benefit will be. Then estimate your monthly expenses in retirement. Retirement planners commonly estimate that your retirement income needs are 80 percent of your income in your last year of work. You could play it safe and estimate your retirement income needs at 100 percent. Savings in a 401(k) can make up any gap uncovered by your pension and Social Security.

Moore urges his co-workers to participate in their 401(k) plan, especially since his union doesn't offer a defined-benefit pension plan any longer. In 1986, when he was a member of his union's bargaining committee, he argued for the union to strike in order to defend its pension plan. "I didn't want to lose the pension," he said.

But, the majority of the membership didn't want to strike and accepted a new retirement plan in which the employer contributed 25 cents to the plan for every hour the employee worked. Moore said, under the old pension "I knew 67.5 cents (for each hour worked) was going into the plan."

The retirement plan has been amended since and has become the company's current 401(k) plan, in which the employer matches the first 3 percent of employee contributions dollar for dollar.

At work, Moore preaches the benefits of the 401(k) plan. "We have, spread through the mill, five bulletin boards for 401(k) use," he said.

In addition to posting articles explaining how to use a 401(k) and invest in it, Moore also talks to his colleagues about the plan. "The main thing I try to preach is that the first 3 percent is what you must have. That's a 100 percent return on your money," he said.

Inflation's Bite

Saving in a 401(k) plan can help retirees battle inflation, one of the biggest financial risks that they face.

Social Security benefits are indexed to inflation, but company pension benefits commonly aren't. With a pension, you typically receive the same amount every month. Over time, the buying power of your static monthly payment will decline because of inflation. That's the pension's drawback, Hotz observes.

While today's 3 percent annual inflation rate seems innocuous, it will cut the spending power of your dollars by 45 percent over 20 years, said Clare Hushbeck, public policy analyst with AARP. If inflation creeps up another percentage point, to 4 percent, the buying power of your dollars will decline by 54 percent over 20 years.

Personal savings invested in assets that grow faster than inflation, or at least at the same rate, can help make up for this loss.

Recent news articles highlight the problems that pensions face. For the first time in years, many corporations need to actually contribute to their pension plans. (For much of the 1990s, pension plan investment earnings were high enough that corporations didn't need to make their annual plan contribution. That money was diverted to other uses.) As investment returns have evaporated and a slowing economy trims corporate earnings, corporations are feeling the pinch.

Pete Copeland, 49, is a dispatcher with U.S. Air and a big proponent of the 401(k) plan. Because of his seniority, Copeland qualified for U.S. Air's pension, but a number of years ago the airline stopped offering the plan to new hires in his department. Concerned for their welfare, he talks up the 401(k) plan. "I'm trying to push the guys to do not only the 401(k), but IRAs too," he said.

He speculates that union workers who know they'll receive a company pension may forgo 401(k) contributions because they think the pension will be enough. But, having seen his share of ups and downs in the airline industry, he worries that they could be lured into a false sense of security. "Suppose they turn 57, find the plan is underfunded and the benefit is halved?" he asks.

The U.S. government's Pension Benefit Guarantee Corp. guarantees pension benefits if a plan is terminated, but that insurance may only pay cents on the dollar.

Copeland thinks the ideal situation "is if you have a company-sponsored pension and a 401(k)."

401(k) Tips

Here are some tips to help you get the most out of your 401(k) plan.

 


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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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