Confusion Still Reigns Over Possible Changes To MLB’s Pension Plan

Last week, ESPN’s Adam Rubin reported that Major League Baseball owners were considering a proposal to “eliminate pensions” of non-union personnel — everyone from scouts to  secretaries who work in the general manager’s office. The story included a quote from MLB executive vice president Rob Manfred who said, essentially, that MLB wasn’t eliminating pensions entirely, but amending MLB’s program to allow teams “more flexibility.”

The story led to a great deal of hue and cry, and perhaps rightfully so: Baseball isn’t a distressed industry. Quite the contrary. As Forbes reported Wednesday, the average MLB team gained 23% in value over the last year, the result of a new $12.4 billion dollar national TV contract, skyrocketing local TV contracts and the revenues generated hand-over-fist by MLB Advanced Media. Manfred wasn’t willing to admit that certain owners are simply looking to spend less money on retirement benefits going forward — even in this era of immense prosperity in baseball — but it’s hard to draw a different conclusion.

Let’s start with the basics. Currently, MLB requires teams to offer non-union personnel a defined-benefit retirement plan, commonly known as a pension. In a defined-benefit retirement plan, the employer promises to pay the employee a certain amount upon the employee’s retirement. The amount is determined by a formula using the employee’s salary, years of service and age. The longer the employee works for the same employer, the more benefits he accrues. Once the employee reaches the retirement age set forth in the plan, he receives a set payment either monthly or quarterly until his death.

Employers who offer defined-benefit plans take on a fiduciary relationship to their employees, meaning they must act with the utmost care to protect the assets in the pension plan. The federal law known as the Employee Retirement Income Security Act, or “ERISA,” defines the employer’s numerous obligations. One such obligation is for employers to insure the pension plan with the Pension Benefit Guaranty Corporation. If the pension is properly insured, the PBGC will pay the retiree’s benefits up to certain limits if the plan becomes insolvent. That doesn’t appear to be an issue with the MLB plan.

Under ERISA, pension plans must file a Form 5500 — which the U.S. Department of Labor describes as a “disclosure document for plan participants and beneficiaries, and a source of information and data for use by other Federal agencies, Congress and the private sector in assessing employee benefit, tax, and economic trends and policies.” Form 5500s are then made public, so plan participants and others can obtain information on the health of the plan. Here’s a link to Form 5500 information on the San Francisco Giants’ version of MLB’s Non-Union Personnel Pension Plan. According to the Form 5500, the Giants plan has 546 active participants and $34,229,235 in net assets as of Dec. 31, 2011.

So what happens if MLB owners vote to either eliminate the pension plan or allow teams to opt-out entirely?

It depends what the owners decide to do. There are several possibilities. The first, and most draconian, would be to terminate the pension plan entirely. When a defined-benefit plan goes through a standard termination, the employer must fully fund it. Thereafter, benefits that have already accrued are typically paid out either in a lump sum — if the plan so allows and the employee has so elected — rolled over into a 401(k) plan or IRA, or used to purchase an annuity. With an annuity, the employee receives a monthly payment like the one he may have received under the original pension plan. Once the plan is fully terminated, the employer is released of any further pension plan obligations.

Short of termination, an employer may also “freeze” a defined-benefit plan. There are “soft freezes” and “hard freezes.”  With a typical “soft freeze,” a plan is closed to new employees but continues unabated for existing employees. With a “hard freeze,” employees stop accruing service time and benefits. The plan assets are simply frozen in place until the employee retires. If a plan is fully funded, employers more commonly choose to terminate a plan instead of imposing a hard freeze because a frozen pension plan is still subject to all of the administrative, reporting and other duties imposed by ERISA.

If MLB gives teams more flexibility in providing retirement benefits, what might that look like? ESPN’s report noted that four teams had already received permission to opt out of MLB’s pension plan but only after they had agreed to provide the same or higher level of benefits under their own plan. The Cubs, Brewers, Twins and Blue Jays are the current opt-outs. Toronto’s opt-out makes sense because Canadian law imposes different requirements on pensions than does ERISA.

ESPN’s report didn’t explain why the Cubs, Brewers and Twins opted out, and I wasn’t able to track down that information. I did speak to one scout from an opt-out team who didn’t want his name or team identified. He told me his benefits package changed for the better in the past year as a result of his team’s opt-out. He believed his team offered a defined-benefit retirement plan along with a defined-contribution plan, like a 401(k), in which the team matched his contribution up to 6% of his salary. The scout was, admittedly, vague on specifics, but he was pleased with the changes.

If MLB owners allow teams to either terminate or freeze existing pension plans, it’s likely the league will require teams to offer defined-contribution plans such as a 401(k). Private-sector companies have been trending in this direction for the past decade. As of June 30, only 30% of Fortune 100 companies were offering defined-benefit plans to new employees. As late as 1998, that number was close to 90%. Overall, only 22% of full-time private industry employees participate in a defined-benefit plan, according to the Bureau of Labor Statistics (BLS). At the same time, 68% of full-time private industry employees are offered a defined-contribution plan.

Employers aren’t obligated to make contributions to defined-contribution plans, but most do. BLS reported that, in 2011, 79% of all full-time private sector employees participating in a 401(k) plan received some employer contribution. In 2012, employees under the age of 50 could contribute up to $17,000 to their employer-sponsored 401(k), but the employer could contribute an additional $33,0000, for a total of $50,000 per year. Most employers do not contribute the maximum.

The trend away from defined-benefit plans for private-sector employees is strong and is growing stronger. What may have started in distressed industries as a way to control costs has become the norm. Private companies no longer want the obligation to fully fund their employees’ retirements. The popularity and variety of defined-contribution plans allows employers to provide retirement benefits without taking on fiduciary duties to guarantee a particular amount. The risk of investing for retirement now lies mainly with employees.

But these trends notwithstanding, we are left to wonder why a majority of major-league owners are reportedly so keen to modify or eliminate the pension benefits that have been offered to non-union employees for years. Baseball is thriving. Of course, the same could be said for the NFL, which changed its pension plan in 2009 to permit teams to opt out of the league-wide plan for coaches and front-office employees.

MLB owners are set to meet in early May to discuss and vote on the issue.