Hey SEIU, Why Can’t Your Members Have a 401k?
Is money important to retirement? A silly question. It naturally flows that more money for retirement means a more secure retirement, more freedom and choices on how to enjoy those golden years that were so hard earned and long waited for. Everybody should be concerned about their own retirement. So which is better: a traditional Defined Benefit pension plan or a self-managed Defined Contribution retirement plan?
While both are touted for their respective advantages, Defined Contribution plans are emerging as dominant in the retirement landscape. Over the last thirty years, the number of Defined Benefit plans has dwindled, from about 33% in 1975 to about 7% in 2005. Down from ~103,000 to ~48,000 while total retirement plans rose from 311,000 to around 679,000.
Overwhelmingly, employers are switching to defined contribution plans, such as 401k, 403(b) and profit sharing plans, which allow workers to manage their own retirement funds, make their own investment choices and, because the funds are portable, provide more freedom to take advantage of lucrative job opportunities.
Essentially, it is labor unions who continue to push for defined benefit plans. Unions argue that their members are not sufficiently financially sophisticated to manage their own money. So, instead of hundreds of thousands of workers having individual retirement accounts, the unions require employers to contribute to massive pension funds in which the unions have significant control.
The Service Employees International Union (SEIU) website states, "the purpose of a defined benefit fund is to provide employees who retire with as much replacement income as possible for as long as they live." But what workers get at retirement is a fixed income which is a percentage of what they were earning based upon the number of years worked and other criteria. Participants don’t get to make any of the investment decisions and can’t take advantage of a strong economy and growth years.
The SEIU belief is that it's dangerous to leave the responsibility of prudently investing for retirement up to the employee. Individuals would take either too much or too little risk - take your pick, the SEIU is comfortable arguing out both sides of its mouth - and could become "a member of the elderly poor." So, according to the SEIU, its members have to stick with Defined Benefit plans because 401k plans "Put Our Members Retirement at Risk."
From 1996 to 2006, 3 major indices (S&P, Dow Jones, Russell) averaged returns of 11.19%. The SEIU National Industry Pension Fund averaged returns of only 9.74%. And to do so, it spent an average of $3.5 million each year on investment advisors. These advisors invested a significant amount of SEIU pension fund money in economically targeted development projects primarily selected because they require union-only contracts. What do these rates of return mean in dollars? Well, $100,000 compounded over the 11 years at both interest rates would yield about $342,340 and $291,887, respectively.
Perhaps the SEIU should re-read the ERISA laws, which require pension funds to maximize returns while minimizing risk for the plan participants, not choosing investments that increase contracts for unions in general. If the SEIU really wanted to maximize workers’ retirement income, it should have just bought an index fund and given those millions spent on “investment advisors” to the retirees. Better yet, it should have let its members make their own retirement decisions.
Why are Unions fighting so hard to keep defined benefit pension plans? They say it’s more secure for the workers, but I believe they refuse to give up the financial clout that comes with managing vast pools of other peoples’ money. If the workers all had self-managed 401k accounts, there would be no SEIU National Industry Pension Fund. Without a massive pension fund the SEIU can’t enjoy financial influence over corporations, market influence, voting of proxies, election of directors, sponsorship of activist proposals, selection of certain investment managers, etc. As control of each retirement dollar transfers from the pension fund trustees to individual workers, this influence evaporates. Taking a long term view, unions have to push for defined benefit pensions, not in the financial interests of their members, but for the political interests of themselves.
And besides, if 401k plans are so dangerous for individuals, why has the SEIU had its own 401k plan since 1997?