The Greater Boston Hospitality Employers Local 26 officials knew they had to do something. Only 20 percent of the union’s 4,000 members contributed to the 401(k) retirement plan and the majority risked not saving enough for their retirement.
During contract negotiations, the union pushed for a pension plan that would provide retirement security for hospitality workers in the Boston area and ensure the participants didn’t shoulder all of the investment risk. Meanwhile, participating employers worried that they would bear all of the investment risk and high costs of switching to a traditional defined benefit pension plan.
The union hired Cheiron to design a pension plan that would satisfy the needs of both the union members and participating employers—an attractive retirement package for workers, stable contributions for employers, shared investment risk, and a low likelihood of the plan becoming underfunded at any time.
Cheiron created a variable defined benefit pension plan, its first, that guarantees participants a minimum benefit with the possibility of earning more, depending on the plan’s investment returns. At retirement, participants receive a fixed monthly pension for life.
The advantage of this new plan is that it lets participants earn higher than the minimum benefits when the plan earns between the 5.5 percent floor and a 10 percent cap. If the plan earns even higher returns, the surplus is set aside to cover future liabilities. Participants receive the guaranteed benefit even if the plan earns less than the floor.
The Internal Revenue Service issued a formal determination letter to the plan in July 2017.
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