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January 30, 2019
Merit shop contractors are typically wary of competing for taxpayer-funded construction contracts subject to a government-mandated project labor agreement for a number of reasons, among them concerns about the viability of multiemployer pension plans as a way to help employees achieve their retirement goals—and exposing their business to potentially catastrophic MEPP liability. New information from the U.S. Department of Labor bears out those concerns.
In 2018, 25 out of 60 MEPPs sending Critical and Declining Status Notices to plan participants were in the construction industry, according to a list posted by DOL’s Employee Benefits Security Administration. In addition, 71 out of 122 MEPPs sending Critical Status Notices and 49 out of 71 plans sending Endangered Status Notices were in the construction industry.
“The information on the DOL website demonstrates how some, but not all, construction industry MEPPs that mainly benefit union construction workers and are funded by union-signatory contractors remain in poor financial shape,” said Ben Brubeck, ABC vice president of regulatory, labor and state affairs. “Beneficiaries should be cautious about retirement promises made by some MEPPs, and contractors may be unaware of MEPP liabilities that could cripple a business financially.”
Under ERISA Code Section 305, Critical and Declining MEPPs are projected to be insolvent generally within the next 20 years, putting participants, including retirees, at risk of reduced benefits. In addition, MEPPs in Critical Status have a funded percentage under 65 percent, and MEPPs in Endangered Status have a funded percentage between 65 and 80 percent.
Federal law requires trustees of MEPPs determined to be in Endangered Status, Critical Status, and Critical and Declining Status, to provide notice of this status to participants, beneficiaries, the bargaining parties, the Pension Benefit Guaranty Corporation and DOL no later than 120 days after the close of the plan year. Additional troubled MEPPs from plan year 2018 are expected to send notices to parties through May 2019.
In 2017, 44 out of 80 MEPPs sending Critical and Declining Status Notices, 87 out of 127 MEPPs sending Critical Status Notices and 71 out of 85 MEPPs sending Endangered Status Notices were in the construction industry, according to DOL information.
If MEPPs become insolvent, they are taken over by the Pension Benefit Guaranty Corporation—an independent agency of the federal government that monitors and privately insures pension benefits in private sector defined-benefit plans such as multiemployer pension plans—and qualified individual beneficiaries may receive up to $12,870 per year in defined benefits in certain circumstances. However, because of a number of factors, including exposure to struggling MEPPs, the PBGC is projected to become insolvent around 2025, after which it will not be able to pay guaranteed benefits for insolvent MEPPs.
According to data from the PBGC, the construction industry is a major contributor to current MEPP underfunding and future PBGC MEPP insurance program funding shortfalls:
• According to the PBGC’s 2015 Pension Insurance Data Tables, which contains the most recent PBGC data on industry MEPPs, construction industry MEPPs are responsible for about $240 billion (or 48.4 percent) of all PBGC-insured MEPP underfunding, which totals $496 billion. (See Table M-14: Funding of PBGC-Insured Plans by Industry [2014] Multiemployer Program).
• The amount of the construction industry’s MEPP underfunding continues to get worse. In comparison, similar 2009 PBGC data found the construction industry was responsible for about $87.8 billion (or 45 percent) of PBGC-insured MEPP underfunding (see Table M-14: Funding of PBGC-Insured Plans by Industry [2007] Multiemployer Program). Table M-14 of the 2010 PBGC report indicates the construction industry’s portion of all PBGC-insured MEPP underfunding grew to $167 billion (or 47 percent) in 2009.
• Seven hundred and fifty-nine (53 percent) of the 1,425 MEPPs insured by the PBGC are in the construction industry. (See Table M-8: PBGC-Insured Plans and Participants by Industry [2014] Multiemployer Program).
• The construction industry has a total of $473 billion (49.1 percent) worth of the PBGC’s total liabilities. (See Table M-14: Funding of PBGC-Insured Plans by Industry [2014] Multiemployer Program).
• The largest number of employees from any industry, almost 3.9 million (37.5 percent) of the 10 million PBGC-insured MEPP participants (workers and retirees), is from the construction industry. (See Table M-8: PBGC-Insured Plans and Participants by Industry [2014] Multiemployer Program).
MEPPs and the Construction Industry
All MEPPs are defined by the Taft-Hartley Act of 1947. Typically, construction industry contractors that have signed a collective bargaining agreement with a building trades union(s) pay into a MEPP fund that is managed jointly by trustees from the specific trade union and select representatives from employers signatory to that union. MEPPs provide defined retirement benefits to participating workers who have met vesting schedules and other requirements during their career.
In general, unionized construction trade contractors typically use a defined benefit MEPP retirement model, while nonunion contractors typically provide defined contribution plans such as a portable 401(k) retirement plan.
“Nonunion contractors are extremely cautious about contributing to MEPPs because it can expose their business to future unknown pension liabilities, and many MEPPs are unlikely to help construction workers achieve their retirement goals,” said Brubeck. “They know the MEPP model is flawed and the risks to companies and beneficiaries are just too great to participate.”
During the recession, some contractors participating in MEPPs went out of business. Contractors failing to pay their share of liability to a MEPP creates additional liability for a MEPP’s remaining employer participants, which can cause insurmountable financial burdens on contributing employers and/or eventually force the PBGC to take over the plan and cut benefits.
In addition, lawmakers have pushed construction industry contractors and workers into MEPPs via so-called responsible contractor laws and government-mandated PLAs on taxpayer-funded construction projects that can expose contractors to MEPP liability and harm retirement prospects for its workforce.
An October 2009 report by St. Louis University accounting professor Dr. John R. McGowan, “The Discriminatory Impact of Union Fringe Benefit Requirements on Nonunion Workers Under Government-Mandated Project Labor Agreements,” found nonunion workers’ take-home pay is reduced by at least 20 percent when their employers enter into PLA arrangements containing a MEPP requirement.
In addition, nonunion construction workers subject to a PLAs’ MEPP participation language may lose all contributions made to a MEPP during the life of a project unless they join a union, pay union dues and meet the plan’s vesting requirements.
“Lawmakers should not be forcing construction workers and businesses into a broken and flawed MEPP scheme at the urging of their political benefactors,” said Brubeck. “If lawmakers were aware of the health of troubled union-affiliated MEPPs, they might be less likely to require government-mandated PLAs and so-called responsible contracting policies on taxpayer-funded construction projects.”
Congressional Outlook for MEPPs and the PBGC
At the end of 2018, members of a special Congressional Joint Select Committee on Solvency of Multiemployer Pension Plans failed to deliver a package of reforms to help struggling plans and shore up the PBGC and its MEPP program vulnerabilities.
In the 116th Congress, lawmakers will again offer legislation to address the financial crisis facing some MEPPs and the PBGC.
ABC will continue to monitor all legislative proposals concerning the PBGC and MEPPs and will continue to oppose government-mandated PLAs and other laws mandating contractor and employee participation in MEPPs.
Construction industry stakeholders interested in reviewing construction industry MEPPs in critical and declining, critical and endangered status from 2008 to Jan. 22, 2018, can search this spreadsheet or visit the DOL website on MEPPs.
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