Buy into pension, is this a good buy?

[igsoy]

An older colleague just mentioned to me that she had incorporated to take advantage of making contributions for herself into the union pension plan. The people at the local union office actually suggested she do this.

I think that by incorporating, you can pay FICA on less of your "income" because you can decide how much to pay yourself in salary? Is this correct? If so, that would be one plus.

The pension plan the way I see it is a great/ridiculous return on your money for people close to 65, but it is totally different for someone 30 years away. This plan will give you $3.25/month in retirement, that's $39/yr for life (no COLA) for every $100 you put in now. So doing this when you are 55 is a no brainer, you'd be stupid not to do it.

At what age do the returns become only average or worse due to inflation: 20,30,40 years away?

I am already vested with a small amount from employer contrubutions made on my behalf, but can't decide if I should take what is currently extra 1099 income (self employed) and incorporate to follow this plan like my older friend, or if I should just wait and do it when I am closer to payoff age.

 

[tightasadrum]

A 39% return I smell high risk here. Or is the first year a teaser rate? Way too little information for any real opinion.

 

[igsoy]

A 39% return I smell high risk here. Or is the first year a teaser rate? Way too little information for any real opinion.

I don't have any technical info on the investments the plan makes, but it is a large, stable, prudent plan. This is a defined benefit plan which only employers can contribute to, but you can become your own employer and pay in if you are incorporated rather than self-employed. I am sure the fund mitigates the risk by taking advantage of people who never get vested and being able to use young peoples money for 40 years before they have to pay them their $39/year (no inflation adjustment). Also there is a large penalty for taking 5 or 10 yrs early (41% or 63% cut in benefit). Being musicians many people are not able to keep working till 65, so not that many are having contributions put in for them at that guaranteed high return stage of the last 10 years.

 

[ziggy29]

A 39% return I smell high risk here. Or is the first year a teaser rate? Way too little information for any real opinion.

Agreed with your last sentence, but depending on when the payout happens, I have no problem with believing that $100 put in today could return $39 a year well into the future. After all, if today's $100 grows to $800 over (say) 30 years, then generating a $39 annual return on $800 is believable.

Hard to believe someone who is 55+ would get such a deal, though.

 

[igsoy]

depending on when the payout happens, I have no problem with believing that $100 put in today could return $39 a year well into the future. After all, if today's $100 grows to $800 over (say) 30 years, then generating a $39 annual return on $800 is believable.

So you are figuring on an invested amount doubling in 10 years? Is this a standard? Then $39 on 800 (30 years) is 4.875%, on 1600 (40 years) that is only 2.437%, on 400 (20 years) it is 9.75%, and on 200 (10 years) it is 19.5%.

Is there a formula which could give me the in-between years as well? My situation, I am 26 years away from the full monthly payout. It seems like the 20 year percent is decent to start, but of course it will lose a great deal of value by the time you are 15 yrs into retirement. Does anybody have a feel for when it makes sense to begin contributions to make a better result than just investing the same money in Vanguard?

 

[ziggy29]

So you are figuring on an invested amount doubling in 10 years? Is this a standard? Then $39 on 800 (30 years) is 4.875%, on 1600 (40 years) that is only 2.437%, on 400 (20 years) it is 9.75%, and on 200 (10 years) it is 19.5%.

I have no idea. I was just giving an example of how this could be the case for someone who is (say) 25 or 35. I'm pretty sure someone who is 55 today wouldn't be able to get $39 in income for every $100 they put in today.

 

[saluki9]

Something is missing in this story.

I deal with a lot of DB plans and these buy-ins are always age or service dependent. I will say that some plans are negotiated small additions by the employee late in their career can mean a huge difference in retirement income.

I once did work for a guy who spent time early in his career as a teacher. When he started working with us he was in his early 60s. Working with the IL teachers retirement system we figured that by buying a couple years of service which was like $8K he went from a $500/month to a $1500/ month benefit for life.

 

[igsoy]

Something is missing in this story.
I deal with a lot of DB plans and these buy-ins are always age or service dependent.

I will admit this is a very unusual pension plan. It is not through a company or a state or government entity. It covers a range of employment from full-time symphony jobs to recording artists working for many different labels/studios to freelancers working under 100 different contracts a year, quite a diverse population. Their bread and butter is the person who has been contributing on a full-time salary since they were 21. That early money stays in the plan a long time, and has a really poor return. Many full time players will either burn out or may not be able to maintain the necessary high standard of playing till age 65 (hearing decline, diminished lung capacity, tendonitis, arthritis), so they are no longer contributing in those last years for the highest return.

But for those who do contribute $100 that close to 65, the payout is the same $3.25/month as for those chumps contributing $100 at age 21. And it is probable that those contributing at that late age have also been contributing since age 21, so their average return is quite a bit lower.

 

[ats5g]

igsoy,

You should definitely get more details on this. It sounds like a variation of a Multiemployer Plan, in which many employers contribute to the plan for their union employees. Some questions to ask are:

1) is the plan covered by the PBGC
2) how do the contributions work? can they increase/decrease? what would affect this increase/decrease? if the plan assets tank, are you on the hook for more contributions?
3) how is the benefit formula calculated?
4) how long is the vesting?

Most pension plans are based on years of service. For example, 2% X years of service X final salary - (.02)*(30years)*($45,000) = $27,000 per year. These types of defined benefit pensions are usually back-loaded, meaning that the majority of the benefit accrues close to the end of the career. For people that work in the same union for a long time, not a bad proposition, but for people that change jobs/unions/employers a lot, a defined contribution plan is generally better because the benefits acrue at a more even pace.

I'm a little doubtful that the $39 for every $100 is for every age. My guess is that is fluctuates based on age, like the $100 [lump sum] is lower for younger people and higher for older people. Your basically funding a deferred immediate annuity in the future in the present.

Anyway, go get the summary plan description to find all this out.

- Alec

 

[Texas Proud]

I will admit this is a very unusual pension plan. It is not through a company or a state or government entity. It covers a range of employment from full-time symphony jobs to recording artists working for many different labels/studios to freelancers working under 100 different contracts a year, quite a diverse population. Their bread and butter is the person who has been contributing on a full-time salary since they were 21. That early money stays in the plan a long time, and has a really poor return. Many full time players will either burn out or may not be able to maintain the necessary high standard of playing till age 65 (hearing decline, diminished lung capacity, tendonitis, arthritis), so they are no longer contributing in those last years for the highest return.

But for those who do contribute $100 that close to 65, the payout is the same $3.25/month as for those chumps contributing $100 at age 21. And it is probable that those contributing at that late age have also been contributing since age 21, so their average return is quite a bit lower.

I think you are misinterpreting the plan big time... nobody is going to give someone who is 60 or so the EXACT same pension payments to someone who is 21 for the same money input...

What I read you saying is that if you put in $100 now(say 60), you get $39 per year when you hit 65. And the guy who is 21 who puts in $100 will get $39 per year when HE retires at 65.... and if this is what you are saying... back to my 1st paragraph....

 

[RetireeRobert]

The pension plan the way I see it is a great/ridiculous return on your money for people close to 65, but it is totally different for someone 30 years away. This plan will give you $3.25/month in retirement, that's $39/yr for life (no COLA) for every $100 you put in now. So doing this when you are 55 is a no brainer, you'd be stupid not to do it.

Over 61 years I have always found this rule to be true----"there is no such thing as a free lunch".

I highly doubt any plan could (or would be legally allowed to) work the way you say you understand it to work. If it does, it is only a matter of time until the 20 and 30 year-olds sue the plan big time!

Another rule I have always found to be true is----"if it sounds too good to be true, it is too good to be true".

The other advice offered, I second----get ALL details of the plan provisions and promised benefits. Do thorough research on the plan custodian and administrator. Who is holding the money? What are the plan investment options?

Not to stereotype organizations here, but I have seen more than one story on union pension funds being plundered/misadministered/stolen from by union officials. Not sure if this is a union plan, but you ruled out almost every other group.

In other words----CAUTION is the word of the day.

You needs LOTS more info before putting any money in this.

 

[igsoy]

I highly doubt any plan could (or would be legally allowed to) work the way you say you understand it to work. If it does, it is only a matter of time until the 20 and 30 year-olds sue the plan big time!

Why would they sue, they are not being treated any differently, the 55 year olds also get a crappy return on all the money they put in at 20 and 30.

(ats5g)
--1) is the plan covered by the PBGC YES
--2) how do the contributions work? can they increase/decrease? what would affect this increase/decrease? The contributions are a percentage extra for each paycheck:10% for shows and recordings, 4% for non-profit orchestra, ballet, etc... Many of us have quite variable incomes year to year, so the benefits are tied directly to how many dollars have been contributed for you each year.
--if the plan assets tank, are you on the hook for more contributions? Don't know, but the administrators have been adjusting the payoff as needed to keep the plan in good health. In 1999 due to outstanding returns they raised the payoff for new contributions to $4.65/month (at 65) per $100 in your account., in 2003 due to outstanding lack of returns they lowered the payoff for new contributions to $3.50/month, and just this year they lowered the payoff for new contributions to $3.25/month to keep the plan healthy. This makes it a little complicated to figure my benefit with three different rates on contributions from different years. They could lower it again in the future, but at least you know what each new dollar will do for you.
--3) how is the benefit formula calculated? That is it, when you reach 65, you get that amount per month times every $100 in your account. If you start drawing at 55, as some will probably do, you only get 37% of the stated amount, if you start drawing at 60, you only get 59% of the stated amount. I am sure many people draw early, as I mentioned in my other post many musicians cannot continue at the highest standard all the way up to retirement. Many people drawing early lightens the plan liability for the plan a great deal, I am sure.
--4) how long is the vesting? You must have $3000 in contract wages (paychecks) for 5 consecutive years to vest, you can earn partial years, but it will take a long time that way. Once you are vested you could go the rest of the time till 55-65 without any other contributions and you will still get your tiny payout at retirement age. The plan has to be this flexible because of the variable nature of the business.

I appreciate those of you trying to understand this and suffering through the explanation. Does anybody have thoughts on the time frame I am looking for, taking the effects of inflation into account?

It strikes me that you could relate this to the dreaded annuity idea, and you would want to figure if you are coming out as well as what you could buy in that arena?

 

[RetireeRobert]

Why would they sue, they are not being treated any differently, the 55 year olds also get a crappy return on all the money they put in at 20 and 30........

Don't know, but the administrators have been adjusting the payoff as needed to keep the plan in good health. In 1999 due to outstanding returns they raised the payoff for new contributions to $4.65/month (at 65) per $100 in your account., in 2003 due to outstanding lack of returns they lowered the payoff for new contributions to $3.50/month, and just this year they lowered the payoff for new contributions to $3.25/month to keep the plan healthy. This makes it a little complicated to figure my benefit with three different rates on contributions from different years.

1) Yes, the 55 y.o.'s get the same crappy return on the money they put in when they were 20 or 30 (maybe, except you now say they adjust the returns on new money all the time, so maybe the 55ers don't get a crappy return on money put in 30 some years ago).

But you earlier maintained the 55 or 65 year old get the same return *at retirement* on new money they put in *this year* as does the 20 or 30 year old----that is the part that floors me. That means a 65 year old gets x dollars after one year, and a 20 year old gets the same x dollars but only after 45 years. Does that sound like reality to you? I have never heard of a plan operating this way.

I may be all wet and wishing I were a musician eligible for this plan, but I suggest more thorough study of plan documents. And talking with multiple employees of the plan administrator as to how it works, talking to multiple retirees from the plan, and in general going over and over and over---just exactly how do contributions grow, how are benefits computed, how long has the plan been in existence and administered by the same organization, etc etc etc.

I still believe you must be mis-understanding some charts you have seen or other info you have heard. I just cannot believe a 65 year old who contributes $100 *this year*, then retires after one year, gets $36 after only the one year. While a 20 year old who contributes $100 *this year*, only gets his $36 after another 45 years. Does that really sound believable, doable, sustainable to you?


2)The info you mention about the administrator routinely changing the payout rates on new money would make some sense. But doesn't that make it really, really hard for anyone to know just what the hell pension they will end up with after 25, 30 or 40 years. If the administrators have changed the payout rates 15, or 20, or 30 times? Kind of takes the "defined" out of this defined benefit plan.


At any rate, you describe a very interesting pension. Please, as you gain more info and do more study, share your learnings and understandings here. I, for one, would like to know if this plan works as you now say. And what union administers it, and what are the membership/location requirements for joining. My oldest daughter is a musician. She is currently funding a Roth IRA each year for her retirement. Hasn't mentioned any union plans that may be available.

 

[Texas Proud]

I still do not believe you in what you say.... you have that for every $100 in your account you would get $4.25 or $3.25 PER MONTH... That would be $51 per year on only $100 at the higher rate... NOBODY can do that for your lifetime...

 

[igsoy]

I still do not believe you in what you say.... you have that for every $100 in your account you would get $4.25 or $3.25 PER MONTH... That would be $51 per year on only $100 at the higher rate... NOBODY can do that for your lifetime...

The $4+ was from the tech boom, the pension fund returns were crazy high, and they raised the payout for contributions made during those heady years. After the tech crash, they reverted to more reasonable payouts, and recently reined it in a tad more.

Inflation adjusted, getting 39 or 51/yr is pretty crappy for a 40-45 yr return on your $100. It is abysmal at 50 or 60 yrs return when you are later in retirement. Or if you only count from 30 yr (age 35), then it seems like it starts at a decent payout, but that too becomes worse and worse as you get to yr 40 and 50 of the returns. If you only count from 20 yr (age 45) then you start out with a good return that beats the 20 yr market returns, but it quickly becomes average, and then poor again by late retirement. Finally, if you only count from 10 yr (age 55) then you come out with a great return that turns into good, and then average.

The thing is, no one really would start contributing at age 55. Everyone getting that great return would also have paid in during the good, average, and crappy years, as well. So it all averages out. No one wins their 1st symphony job at 55, or even 45. People don't suddenly start making a living at music at those late ages. In fact it is the opposite, many start out young, make contributions and then leave the business because they realize it is too hard to make a go of it when they are supporting a family.

This is probably a big thing that helps the plan stay in good shape, the people that never even get vested, and the people that only ever get the longest-term returns. I am sure this is also true of the Actor's Equity Fund. Many young actors have some success starting out, but the business chews them up, they end up getting a "real" job and their money sits in there for a very long time earning money for the fund till they get their small payout.

 

[RetireeRobert]

OK, I googled, and found this site (and others) talking about an American Federation of Musicians' Union pension plan. Is this the plan you are talking about? This particular site is of one local, but from the google hits, I think the same AFM plan is available in several areas of the country via different locals.

About Local 802 - Union Benefits & Services - Pension

I will study it to understand it better. It says it has 6 Union member trustees and 6 employer trustees. Contributions are paid by employers only---no voluntary worker contributions (this is where you came up with the self-employed incorporated bit so you could contribute as an "employer" on your own behalf?).

 

[RetireeRobert]

OK, follows is an excerpt from the 802 site description of the plan that I understand:

"The current regular pension benefit from the AFM-EP Fund consists of monthly payments to you based on (1) total contributions credited to you, and (2) your age on the effective date of your pension."

And they showed a table that said---at 65 you get $3.50 per month for every $100 credits in your account at that time. or, if you retire at age 64 you get $3.13 per month for every $100 of cyour credits.

Now a few thoughts.

Anyone starting to contribute at say age 60, or 62, or 64 is NOT going to have many contributions credited their account by age 65. That means not a very big pension. Small/short participation means small credits means small pension---makes sense.

On the other hand a person who contributes over 30 or 35 years will have many more credits, longer participation, and that means bigger pension. Makes sense.

What that brief description did not say was how the payout rates are either guaranteed on each years contributions. OR if you retire in a real good year, maybe you get $5.75 per $100 on EVERYTHING. Or if you retire in a bad year after a change in payout rates, you only get $2.10 per $100 on EVERYTHING. Igsoy's previous comments make it sound like each year's contributions are guaranteed the payout rate in effect in the year they were made.

Unanwered question----after vesting, can the musician withdraw accumulated contributions and earnings as lumpsum and entirely leave the plan? Anytime?

 

[igsoy]

OK, I googled, and found this site (and others) talking about an American Federation of Musicians' Union pension plan.

Yes RR, that is the one. The union represents US and Canadian musicians, although I think those Canuckian pension funds have to follow different rules, so they probably have a parallel plan.

Re: incorporating to make Employer contributions, that is the same way 401ks work, the employer (your company) can make larger contributions than you as an individual can. This plan specifically says you cannot make contributions unless you are incorporated. And then it still has to be from union covered engagements, you can't go trying to sneak in contributions on payments for teaching, for example.

The local president encouraged my friend to incorporate and do this at age 56, probably because the local will get new work dues for each engagement that it wasn't getting when she was doing it self-employed.

 

[RetireeRobert]

Yes RR, that is the one. The union represents US and Canadian musicians, although I think those Canuckian pension funds have to follow different rules, so they probably have a parallel plan.

Re: incorporating to make Employer contributions, that is the same way 401ks work, the employer (your company) can make larger contributions than you as an individual can. This plan specifically says you cannot make contributions unless you are incorporated. And then it still has to be from union covered engagements, you can't go trying to sneak in contributions on payments for teaching, for example.

The local president encouraged my friend to incorporate and do this at age 56, probably because the local will get new work dues for each engagement that it wasn't getting when she was doing it self-employed.

OK. I am on the right track. Googled some more and hit what looks like a jackpot site about the plan: American Federation of Musicians and Employers' Pension Fund

I will study this site more on how this plan works.

One thing I think I read somewhere is the only contributions that go in are from union covered gigs. That is, the union has a "gig" contract that specifies the employer pays x % pension contribution for the musician in addition to the actual "pay" for the gig. Somehow, I am thinking even if a person self-employs/incorporates, there must be some limit (IRS rules) on how much of earnings can go into pension as contribution.

Anyway, I will read some more.

 

[igsoy]

Igsoy's previous comments make it sound like each year's contributions are guaranteed the payout rate in effect in the year they were made.

Unanwered question----after vesting, can the musician withdraw accumulated contributions and earnings as lumpsum and entirely leave the plan? Anytime?

The forms I have read specifically state: for contributions made up to Jan 1, 2004, you will receive $X/month. for contributions made after Jan.1, 2004 you will receive$X-y/month. The next change was just announced, so doesn't go into effect till next Jan.

The only thing I remember reading about a lump sum was that your beneficiary would get a lump sum of half of all contributions made for you (can't really remember) if you were to die prior to receiving any payout. You can't leave the plan. You have to let it ride.

 

[RetireeRobert]

I read briefly the plan docs at the link I found. Igsoy, go to that link as it seems to have lots of detail on understanding the plan---and up-to-date.

I suppose one question that occurs to me (as father of a 23 yo musician) is: Would she be better of getting her performing gigs via AMF union, and thereby get AMF pension contributions to this plan?

Or would she be better off getting her own performing gigs NOT via union, and getting the employer to pay a fee equal to union gig rate PLUS amount they would pay for pension. Then she would simply fund her own IRA/Keogh retireplan(s)?

Not an easy question for sure. Would she get as much work not via union as she would thru union? Don't know. Would she get the better rates on her own gor gigs as she would thru union? Don't know.

IGSOY---if you are considering alternatives, you might want to compare:
Incorporate so you can contribute to AMF pension for yourself-----or incorporate so you can fund your own Keough plan(or SIMPLE IRA, or others). If you go Keough route, you are NOT limited to performance gig fees, but could also include teaching income, etc.

Bedtime. Tomorrow I will read more on AMF pension and share thoughts when I am more lucid.

 

[igsoy]

Somehow, I am thinking even if a person self-employs/incorporates, there must be some limit (IRS rules) on how much of earnings can go into pension as contribution.

Yes, that is right, they told my friend she could do 15%. We are talking about music, here, noone is getting rich. She books her string quartet year round for weddings so actually has a much greater potential for contributing than I would, most of my work is as an employee of various venues and is already covered under the show or orchestral pension percentages. So as an employer, I would just have a small amount of church gigs that I book and some summer park concerts.

 

[igsoy]

Or would she be better off getting her own performing gigs NOT via union, and getting the employer to pay a fee equal to union gig rate PLUS amount they would pay for pension. Then she would simply fund her own IRA/Keogh retireplan(s)?

Not an easy question for sure. Would she get as much work not via union as she would thru union? Don't know. Would she get the better rates on her own gor gigs as she would thru union? Don't know.

Well being in the union never got anyone more work, you get that by contacts and reputation and being available at the right time, but not being in the union could be keeping her from getting more work. Someone she played with may give a contractor her name to fill in for a gig, but they check and she is not a member, so they can't hire her.

It also depends on where she is located. In some cities the union does not hold as much sway as others. Seattle comes to mind.

Regarding getting better rates on her own, union members can charge as high as their services are worth in the market, they just can't charge less than scale. Whether the gig is a union contract gig or just a pickup group, you are not allowed to work for less than scale, or play in a group where anyone else is paid less than scale. The scales for concerts are generally pretty reasonable, and many people with respected groups would charge higher than that anyway.

One note in the pension vs. Keough/401k debate is some states do not tax pension income in retirement, but they do tax 401k. I could be getting this wrong, but I think I read it somewhere.

 

[RetireeRobert]

I read through the plan description and info available at the plan's homesite. I believe the following are true statements about the plan:

The only covered employment is via union negotiated jobs, and the employer makes the pension plan contribution. Contributions to the plan from musicians cannot be accepted unless the musician is self-employed and incorporated or an LLC

I did not find any provision for withdrawal of accumulated contributions by the musician before retirement.

Vesting in the plan entitles the musician to a retirement benefit at earliest retirement age of 55 or any age after that. Normal retirement age is 65.

The musician can elect a single lifetime pension, or if married can elect a joint lifetime payout with the beneficiary to get 50% at death of plan member.

There was some indication that at retirement the musician could elect instead of the lifetime pension, a lumpsum which could be elgible for rollover to an IRA. But I did not find discussion of how the lumpsum amount would be determined, if it would include accumulated earnings or not, or if it would be a discounted future value of the allowable lifetime payments stream.

The pension payout rate is subject to periodic change, and the most recent change seems to have been in 2004. That change was downward.


THOUGHTS:
If a musician is routinely performing in covered employment anyway, and contributions are being made on his behalf to the plan, the pension is a welcome benefit in addition to social security.

If a musician is contemplating incorporating in order to make self-employed contributions to the plan as well, it might be wise to instead make such additional retirement savings to a personal IRA plan if under age 55.
A muscian age 55 or older may want to incorporate (or LLC) and make self-employed contributions to the AFM plan.

Why the age distinction? It appears from the way the plan operates that the older musicians get the same payout per $100 of contributions as younger members---but they get it sooner. They recover their contributions sooner and "profit" sooner (get pension payouts in excess of what they contributed---their breakeven point is reached faster).

Because the plan payout rates have changed periodically, it is impossible to make longterm projections of what younger musicians can expect at retirement. Because withdrawals form the plan can only be made at retirement, younger musicians would be wise to keep their money fully under their own control in IRA's.
And because the way the plan operates, it appears it is set up to encourage "adverse selection" by older musicians-----ie, the 55 and older make as many self-employed contributions as they can to the plan to garner additional benefits at retirement. This "adverse selection" cannot go on forever without affecting plan payout rates. Sooner or later, the payout rates would have to drop again to pay for it. The younger musicians would be stuck with these lower rates.

Summary: At any age, consider the AFM pension (on work you do anyway) a nice supplement to SS.
If you are 55 or over, go for the addition self-employed AFM plan contributions. You reach breakeven fast enough to more than recover these extra buy-ins.
If you are under 55, forget the extra AFM plan buyins. Take that extra money for retirement and put it in IRA that is under your 100% control.