Central States Pension Fund: Investment Policy Decisions and Challenges Facing the Plan
Released: 2018-06-04T00:00:00

Letter

Background

CSPF is a defined benefit multiemployer pension plan. Multiemployer plans are often created and maintained through collective bargaining agreements between labor unions and two or more employers, so that workers who move from job to job and employer to employer within an industry can continue to accrue pension benefits within the same plan over the course of their careers. Multiemployer plans are typically found in industries with many small employers such as trucking, building and construction, and retail food sales. In 2017, there were about 1,400 defined benefit multiemployer plans nationwide covering more than 10 million participants.

Multiemployer Plan Administration, Funding, and Benefits

Administration

Most multiemployer plans are jointly administered and governed by a board of trustees selected by labor and management. The labor union typically determines how the trustees representing labor are chosen and the contributing employers or an employer association typically determines how the trustees representing management are chosen. The trustees set the overall plan policy, direct plan activities, and set benefit levels (see fig. 1).

Multiemployer plans are “prefunded,” or funded in advance, primarily by employer contributions. The employer contribution is generally negotiated through a collective bargaining agreement, and is often based on a dollar amount per hour worked by each employee covered by the agreement. Employer contributions are pooled in a trust fund for investment purposes, to pay benefits to retirees and their beneficiaries, and for administrative expenses. Multiemployer plan trustees typically decide how the trust fund should be invested to meet the plan’s objectives, but the trustees can use investment managers to determine how the trust fund should be invested. Multiemployer plan trust funds can be allocated among many different types of assets, any of which can generally be passively- or actively-managed, domestically or internationally based, or publicly or nonpublicly traded (see table 1).

A plan’s funded percentage is its ratio of plan assets to plan liabilities. Because the amount needed to pay pension benefits for many years into the future cannot be known with certainty due to a variety of economic and demographic factors, including the potential volatility of asset values, estimates of a plan’s funded percentage may vary from year to year. Defined benefit pension plans use a “discount rate” to convert projected future benefits into their “present value.” The discount rate is the interest rate used to determine the current value of estimated future benefit payments and is an integral part of estimating a plan’s liabilities. The higher the discount rate, the lower the plan’s estimate of its liability. Multiemployer plans use an “assumed-return approach” that bases the discount rate on a long-term assumed average rate of return on the pension plan’s assets. Under this approach, the discount rate depends on the allocation of plan assets. For example, a reallocation of plan assets into more stocks and fewer bonds typically increases the discount rate, which reduces the estimated value of plan liabilities, and therefore, reduces the minimum amount of funding required.

Looking at the entire “multiemployer system”—the aggregation of multiemployer plans governed by ERISA and insured by PBGC—shows that while the system was significantly underfunded around 2001 and 2009, its funded position has improved since 2009. Specifically, analyses published by the Center for Retirement Research at Boston College and the Society of Actuaries used plan regulatory filings to calculate the funded status for the system and determined that it was approaching 80 percent funded by 2014 after falling during the 2008 market downturn. However, some observers have noted that while many plans are making progress toward their minimum targets, a subset of plans face serious financial difficulties.

Benefits

Multiemployer retirement benefits are generally determined by the board of trustees. The bargaining parties negotiate a contribution rate and the trustees adopt or amend the plan’s benefit formulas and provisions. Decisions to increase benefits or change the plan are also typically made by the board of trustees. Benefit amounts are generally based on a worker’s years of service and either a flat dollar amount or the worker’s wage or salary history, subject to further adjustment based on the age of retirement.

The Central States, Southeast and Southwest Areas Pension Fund (CSPF)

CSPF was established in 1955 to provide pension benefits to International Brotherhood of Teamsters union members (Teamsters) in the trucking industry, and it is one of the largest multiemployer plans. In the late 1970s, CSPF was the subject of investigations by the IRS within the U.S. Department of the Treasury (Treasury), and by DOL and the U.S. Department of Justice (DOJ). The DOL investigation ultimately resulted in the establishment of a federal court-enforceable consent decree in 1982 that remains in force today. CSPF held more than $4.3 billion in Net Assets at the end of 1982 after the consent decree was established. The plan’s Net Assets peaked at nearly $26.8 billion at the end of 2007 and declined to about $15.3 billion at the end of 2016 (see fig. 2). As of 2016, CSPF reported that it had about 1,400 contributing employers and almost 385,000 participants.

The number of active CSPF participants has declined over time. In 2016, 16 percent of about 385,000 participants were active, i.e., still working in covered employment that resulted in employer contributions to the plan. In comparison, CSPF reported in 1982 that 69 percent of more than 466,000 participants were active participants. Since the 1980s, CSPF’s ratio of active to nonworking participants has declined more dramatically than the average for multiemployer plans. By 2015, only three of the plan’s 50 largest employers from 1980 still paid into the plan, and for each full-time active employee there were over five nonworking participants, mainly retirees. As a result, benefit payments to CSPF retirees have exceeded employer contributions in every year since 1984. Thus, CSPF has generally drawn down its investment assets. In 2016, CSPF withdrew over $2 billion from investment assets (see fig. 3.).

CSPF has historically had fewer plan assets than were needed to fully fund the accrued liability—the difference referred to as unfunded liability. In 1982, we reported that CSPF was “thinly funded”—as the January 1, 1980, actuarial valuation report showed the plan’s unfunded liability was about $6 billion—and suggested that IRS should closely monitor CSPF’s financial status. In 2015, the plan’s actuary certified that the plan was in “critical and declining” status. The plan has been operating under an ERISA-required rehabilitation plan since March 25, 2008, which is expected to last indefinitely. As of January 1, 2017, the plan was funded to about 38 percent of its accrued liability. In September 2015, CSPF filed an application with Treasury seeking approval to reduce benefits pursuant to provisions in the Multiemployer Pension Reform Act of 2014 (MPRA), which is fully discussed later in this section. The application was denied in May 2016 based, in part, on Treasury’s determination that the plan’s proposed benefit suspensions were not reasonably estimated to allow the plan to remain solvent. In 2017, CSPF announced it would no longer be able to avoid the projected insolvency. (See app. II for a timeline of key events affecting CSPF.)

The Consent Decree

As previously mentioned, CSPF was the subject of investigations in the 1970s by IRS, DOL, and DOJ. DOL’s investigation focused on numerous loan and investment practices alleged to constitute fiduciary breaches under ERISA, such as loans made to companies on the verge of bankruptcy, additional loans made to borrowers who had histories of delinquency, loans to borrowers to pay interest on outstanding loans that the fund recorded as interest income, and lack of controls over rental income. As a result of its investigation, DOL filed suit against the former trustees of CSPF and, in September 1982, the parties entered into a consent decree, which remains in force today. The consent decree provides measures intended to ensure that the plan complies with the requirements of ERISA, including providing for oversight by the court and DOL, and prescribes roles for multiple parties in its administration. For example, certain plan activities must be submitted to DOL for comment and to the court for approval, including new trustee approvals and some investment manager appointments. According to DOL, to prevent criminal influence from regaining a foothold of control over plan assets, the consent decree generally requires court-approved independent asset managers—called “named fiduciaries”—to manage CSPF’s investments. CSPF’s trustees are generally prohibited from managing assets; however, they remain responsible for selecting, subject to court approval, and overseeing named fiduciaries and monitoring plan performance. To focus attention on compliance with ERISA fiduciary responsibility provisions, the consent decree provides for a court-appointed independent special counsel with authority to observe plan activities and oversee and report on the plan. (See app. III for additional detail on the key provisions of the consent decree.)

Legal Framework

Employee Retirement Income Security Act of 1974

In 1974, Congress passed ERISA to protect the interests of participants and beneficiaries of private sector employee benefit plans. Among other things, ERISA requires plans to meet certain requirements and minimum standards. DOL, IRS, and PBGC are generally responsible for administering ERISA and related regulations.

DOL has primary responsibility for administering and enforcing the fiduciary responsibility provisions under Part 4 of Title I of ERISA, which include the requirement that plan fiduciaries act prudently and in the sole interest of participants and beneficiaries.

Treasury, specifically the IRS, is charged with determining whether a private sector pension plan qualifies for preferential tax treatment under the Internal Revenue Code. Additionally, the IRS is generally responsible for enforcing ERISA’s minimum funding requirements, among other things. ERISA generally requires that multiemployer plans meet minimum funding standards, which specify a funding target that must be met over a specified period of time. The funding target for such plans is measured based on assumptions as to future investment returns, rates of mortality, retirement ages, and other economic and demographic assumptions. Under the standards, a plan must collect a minimum level of contributions each year to show progress toward meeting its target, or the plan employers may be assessed excise taxes and owe the plan for missed contributions plus interest. Minimum contribution levels may vary from year to year due to a variety of economic and demographic factors, such as addressing differences between assumed investment returns and the plan’s actual investment returns.

To protect retirees’ pension benefits in the event that plan sponsors are unable to pay plan benefits, PBGC was created by ERISA. PBGC is financed through mandatory insurance premiums paid by plans and plan sponsors, with premium rates set by law. PBGC operates two distinct insurance programs: one for multiemployer plans and another for single- employer plans. Each program has separate insurance funds and different benefit guarantee rules.

The events that trigger PBGC intervention differ between multiemployer and single-employer plans. For multiemployer plans, the triggering event is plan insolvency, the point at which a plan begins to run out of money while not having sufficient assets to pay the full benefits that were originally promised when due. PBGC does not take over operations of an insolvent multiemployer plan; rather, it provides loan assistance to pay administrative expenses and benefits up to the PBGC-guaranteed level. According to PBGC, only once in its history has a financial assistance loan from the multiemployer pension insurance program been repaid. In 2017, PBGC provided financial assistance to 72 insolvent multiemployer plans for an aggregate amount of $141 million. For single-employer plans the triggering event is termination of an underfunded plan—generally, when the employer goes out of business or enters bankruptcy. When this happens, PBGC takes over the plan’s assets, administration, and payment of plan benefits (up to the statutory limit).

The PBGC-guaranteed benefit amounts for multiemployer plans and the premiums assessed by PBGC to cover those benefit guarantees are significantly lower than those for single-employer plans. Each insured multiemployer plan pays flat-rate insurance premiums to PBGC based on the number of participants covered. The annual premium rate for plan years beginning in January 2017 was $28 per participant and it is adjusted annually based on the national average wage index. (See app. II for the PBGC premium rates that have been in effect since the consent decree was established in 1982.) When plans receive financial assistance, participants face a reduction in benefits. For example, using 2013 data, PBGC estimated 21 percent of more than 59,000 selected participants in insolvent multiemployer plans then receiving financial assistance from PBGC faced a benefit reduction. The proportion of participants facing reductions due to the statutory guarantee limits is expected to increase. About 51 percent of almost 20,000 selected participants in plans that PBGC believed would require future assistance were projected to face a benefit reduction.

Since 2013, the deficit in PBGC’s multiemployer program has increased by nearly 700 percent, from a deficit of $8.3 billion at the end of fiscal year 2013 to $65.1 billion at the end of fiscal year 2017. PBGC estimated that at of the end of 2016, the present value of net new claims by multiemployer plans over the next 10 years would be about $24 billion, or approximately 20 percent higher than its 2015 projections. The program is projected to become insolvent within approximately 8 years. If that happens, participants who rely on PBGC guarantees will receive only a very small fraction of current statutory guarantees. According to PBGC, most participants would receive less than $2,000 a year and in many cases, much less.

We have identified PBGC’s insurance programs as high-risk. This designation was made in part because multiemployer plans that are currently insolvent, or likely to become insolvent in the near future, represent a significant financial threat to the agency’s insurance program. We designated the single-employer program as high-risk in July 2003, and added the multiemployer program in January 2009. Both insurance programs remain on our high-risk list.

Key Amendments to ERISA Affecting Multiemployer Plans

Multiemployer Pension Plan Amendments Act of 1980 Among other things, the Multiemployer Pension Plan Amendments Act of 1980 (MPPAA) made employers liable for a share of unfunded plan benefits when they withdraw from a plan, unless otherwise relieved of their liability, and strengthened certain funding requirements. An employer that chooses to withdraw from a multiemployer plan may be required to continue to contribute if the plan does not have sufficient assets to cover the plan’s current and known future liabilities at the time the employer withdraws; however, these payments may not fully cover the withdrawing employer’s portion of the plan’s liabilities. In such cases, the employers remaining in the plan may effectively assume the remaining liability.

The Pension Protection Act of 2006 The Pension Protection Act of 2006 (PPA) was intended to improve the funding of seriously underfunded multiemployer plans, among other things. It included provisions that require plans in poor financial health to take action to improve their financial condition over the long term and established two categories of troubled plans: (1) “endangered status” or “yellow zone” plans (this category also includes a sub-category of “seriously endangered”), and (2) more seriously troubled “critical status” or “red zone” plans. PPA further required plans in the endangered and critical zones to develop written plans to improve their financial condition, such as by revising benefit structures, increasing contributions, or both, within a prescribed time frame. Multiemployer plans in yellow or red zone status must document their remediation strategies in a written plan, notify plan participants, and report annually on whether scheduled progress has been made. Since the 2008 market decline, the number of participants in endangered and critical plans has generally been decreasing (see fig. 4).

The Multiemployer Pension Reform Act of 2014 In response to the funding crisis facing PBGC and multiemployer pension plans, the Multiemployer Pension Reform Act of 2014 (MPRA) made changes to the multiemployer system that were intended to improve its financial condition. Key changes included:

Creation of critical and declining status. MPRA created a new category, “critical and declining,” for plans in critical status projected to become insolvent during the current plan year or within any of the 14 succeeding plan years, or in certain circumstances, within any of the 19 succeeding plan years. In 2017, PBGC reported that more than 100 multiemployer plans (more than 7 percent of plans) representing approximately 1 million participants (about 10 percent of participants) have been determined to be “critical and declining.”

Permitted reduction of accrued benefits. MPRA permits plans to reduce participants’ and beneficiaries’ accrued retirement benefits if the plan can demonstrate such action is necessary to remain solvent. Plans apply to Treasury for the authority to reduce benefits. Treasury, in consultation with PBGC and DOL, reviews the applications and determines whether the proposed changes would enable the plan to remain solvent.

Increased PBGC premiums. MPRA also increased the PBGC premiums for multiemployer plans from $12 to $26 (per participant per plan year) in 2015 and from $26 to $28 in plan year 2017. The annual premium in subsequent years is indexed to changes in the national average wage index.

Creation of new framework of rules for partition. Partition allows a multiemployer plan to split into two plans—the original and a successor. Partitions are intended to relieve stress on the original plan by transferring the benefits of some participants to a successor plan funded by PBGC and to help retain participant benefits in the plans at levels higher than the PBGC-guaranteed levels.

CSPF’s Critical Financial Condition Is a Result of Factors That Reflect Challenges Experienced by the Multiemployer System

CSPF Has Been Underfunded Since the Consent Decree Was Established

At the time the consent decree was established in 1982, CSPF had less than half the estimated funds needed to cover plan liabilities (and to pay associated benefits over the lifetime of participants) and it has not attained 100 percent of its estimated funding need since then, according to regulatory filings. CSPF’s 1982 Form 5500 we reviewed shows that the plan was less than 40 percent funded prior to the consent decree becoming effective. Over the next two decades, the plan generally made progress toward achieving its targeted level of funding but was never more than 75 percent funded, and funding has generally deteriorated since its 2002 filing (see fig. 5). Overall, the plan’s unfunded liability increased by approximately $11.2 billion (in inflation-adjusted dollars) between January 1983 and January 2016. As a consequence, participant benefits were never fully secured by plan assets over this period, as measured by ERISA’s minimum funding standards, and the plan consistently needed to collect contributions in excess of those needed to fund new benefit accruals to try to make up for its underfunded status.

Stakeholders Described Multiple Factors That Contributed to CSPF’s Critical Financial Condition, Many of Which Have Been Experienced by Other Multiemployer Plans

CSPF officials and other stakeholders identified several factors that contributed to CSPF’s critical financial condition and reflect the challenges faced by many multiemployer plans. For example, like CSPF, many multiemployer plans have experienced financial difficulties due to a combination of investment losses and insufficient employer contributions. In addition to being underfunded prior to the consent decree going into effect, stakeholders identified other specific factors that contributed to CSPF’s critical financial condition, such as trends within the national trucking industry and its workforce, funding challenges and common investment practices of multiemployer plans, and the impact of market downturns on long-term investment performance. Stakeholders also described the effects of the 2007 withdrawal of a key employer, United Parcel Service (UPS), on CSPF’s critical financial condition.

Key Industry Specific Workforce Trends

Stakeholders we interviewed said changes to the workforce, such as declining union membership rates and changes resulting from industry deregulation, affected CSPF and some other multiemployer plans by reducing the number of workers able to participate in their plans. While the multiemployer structure distributes bankruptcy risk across many employers, for any particular multiemployer plan employers are often concentrated in the same industry, making the plans vulnerable to industry- specific trends and risks. For example, stakeholders noted the impact that the Motor Carrier Act of 1980 had on the trucking industry. Specifically, deregulation of the trucking industry reduced government oversight and regulation over interstate trucking shipping rates. The trucking industry became increasingly dominated by nonunion trucking companies resulting in the bankruptcy of many unionized trucking companies, according to stakeholders. New trucking companies typically did not join multiemployer plans because their labor force was not unionized and this, coupled with the bankruptcy of many contributing employers, contributed to a decrease in active participant populations for many plans serving the industry. As the total number of active participants in a plan declines, the resources from which to collect employer contributions declines proportionally. Stakeholders also said these changes were unforeseeable. Limitations on a plan’s ability to increase contributions mean that a plan has less capacity to recover from an underfunded position or to make up for investment returns that fall short of expectations.

A decline in the number of active workers can also accelerate plan “maturity,” as measured by the ratio of nonworking to working participants. Plan maturity has implications for a plan’s investment practices and the time frame over which the plan must be funded. According to PBGC’s data for the multiemployer plans it insures, there were approximately three active participants for every nonworking participant in 1980 (3:1); by 2014, the ratio was approximately one active worker for every two nonworking participants (1:2). Figure 6 shows the change in the percentages of active and nonworking participants for the multiemployer plans that PBGC insures.

CSPF saw an even more dramatic change in its active to nonworking participant ratio from 1982 through 2015. In 1982, there were more than two active workers for every nonworking participant (2:1) and by 2016 that ratio had fallen to approximately one active worker for every five nonworking participants (1:5) (see fig. 7). Because CSPF’s contributing employers were largely trucking companies, stakeholders said this made the fund especially vulnerable to industry-wide shocks. Like the industry as a whole, CSPF was unable to attract new employers to replace exiting employers, in part because of the lack of new unionized employers.

CSPF officials said that changes to the trucking industry and its workforce also led to other challenges for the plan. For example, contributions to the plan declined with the shrinking number of active workers. CSPF officials told us they could not significantly increase the contribution rate paid by remaining employers because of the financial hardship it would cause, and as a result, the plan’s ability to recover from its underfunded position was limited. CSPF officials said that this increased the plan’s reliance on investment returns to try to close the gap between its assets and liabilities.

Funding Challenges and Investment Practices

Stakeholders we interviewed cited challenges inherent in multiemployer plans’ funding and investment practices, and described how the challenges may have contributed to the critical financial condition of some plans, including CSPF.

Stakeholders said that CSPF and many other multiemployer plans have been challenged by employer withdrawals. An employer withdrawal reduces the plan’s number of active worker participants, thereby reducing its contribution base and accelerating plan maturity. A withdrawing employer generally must pay a share of any unfunded benefits. Stakeholders identified several ways in which the withdrawal liability framework could result in a withdrawing employer underpaying its share of an unfunded liability. We have previously reported on the challenges associated with withdrawal liability, including: withdrawal liability assessments are often paid over time, and payment amounts are based on prior contribution rates rather than the employer’s actual withdrawal liability assessment. withdrawal liability payments are subject to a 20-year cap, regardless of whether an employer’s share of unfunded benefits has been fully paid within this 20-year timeframe; plans often did not collect some or all of the scheduled withdrawal liability payments because employers went bankrupt before completing their scheduled payments; and fears of withdrawal liability exposure increasing over time could be an incentive for participating employers to leave a plan and a disincentive for new employers to join a plan; Stakeholders we interviewed also added that the calculation used to determine withdrawal liability may use an investment return assumption that inherently transfers risk to the plan.

When exiting employers do not pay their share of unfunded benefits, any remaining and future employers participating in the plan may effectively assume the unpaid share as a part of their own potential withdrawal liability as well as responsibility for the exiting employer’s “orphaned” participants. Participating employers may negotiate a withdrawal if they perceive a risk that the value of their potential withdrawal liability might grow significantly over time.

In its MPRA application, CSPF cited employer withdrawals and bankruptcies as a significant challenge for the plan. CSPF reported that after deregulation, the number of contributing employers dropped by over 70 percent. While some of the drop could be due to the consolidation of trucking companies after deregulation, CSPF officials cited several cases in which employers went bankrupt or withdrew from the plan, which reduced the plan’s contribution base and accelerated its maturity. Additionally, when employers went bankrupt, they often did not pay their full withdrawal liability. For example, CSPF said two of its major contributing employers left the plan between 2001 and 2003, and left $290 million of more than $403 million in withdrawal liability unpaid after they went bankrupt.

Stakeholders identified funding timeframes as a factor that contributed to the challenges facing many multiemployer plans, including CSPF. ERISA’s minimum funding standards have historically allowed multiemployer plans to amortize, or spread out the period of time for funding certain events, such as investment shortfalls and benefit improvements. For example, CSPF began a 40-year amortization of approximately $6.1 billion in underfunding on January 1, 1981, giving the plan until the end of 2021 to fully fund that amount. Longer amortization periods increase the risk of plan underfunding due to the number and magnitude of changes in the plan’s environment that may occur, such as a general decline in participants or deregulation of an industry. The Pension Protection Act of 2006 shortened amortization periods for single- employer plans to 7 years and the amortization periods for multiemployer plans to 15 years. Shorter amortization periods provide greater benefit security to plan participants by reducing an unfunded liability more rapidly. In addition, shorter amortization periods can be better aligned with the projected timing of benefit payments for a mature plan. However, shorter periods can be a source of hardship for plans with financially troubled contributing employers because they may require higher contributions. According to CSPF officials, CSPF requested and received an additional 10-year amortization extension from the IRS in 2005 after relating that contribution requirements could force participating employers into bankruptcy. One CSPF representative said an amortization extension can also help avoid subjecting the plan’s employers to IRS excise taxes for failing to make required minimum contributions.

Stakeholders we interviewed said that certain common investment practices may have played a role in the critical financial condition of CSPF and other mature and declining plans. In general, multiemployer plans invest in portfolios that are expected, on average, to produce higher returns than a low-risk portfolio, such as one composed entirely of U.S. Treasury securities. Stakeholders also stated that these investment practices may have been too risky because returns can be more volatile, and the higher expected returns might not be achieved. In addition, the Congressional Budget Office has reported that if “plans had been required to fund their benefit liabilities—at the time those liabilities were accrued—with safer investments, such as bonds, the underfunding of multiemployer plans would have been far less significant and would pose less risk to PBGC and beneficiaries.”

Stakeholders also told us that for mature plans like CSPF, these investment practices can pose further challenges. Mature plans, with fewer active employees, have less ability to recoup losses through increased contributions and have less time to recoup losses through investment returns before benefits must be paid. Market corrections, such as those that occurred in 2001 through 2002 and in 2008, can be particularly challenging to mature plans and their participants, especially if a mature plan is also significantly underfunded. Mature plans could mitigate these risks by investing more conservatively, however, the resulting lower expected returns from more conservative investing necessitates higher funding targets and contribution rates, which could be a hardship for employers in an industry with struggling employers. Alternatively, a plan that invests more conservatively may provide lower promised benefits to accommodate the level of contributions it can collect. Lower investment returns from a more conservative investment policy would cost employers more in contributions and could potentially result in employers leaving the plan. Further, investing in a conservative portfolio would be relatively unique among multiemployer plans, and stakeholders said plan managers may feel they are acting in a prudent fashion by investing similarly to their peers. Underfunded plans like CSPF may not see conservative investment as an option if they cannot raise the contributions necessary to fully fund their vested benefits. Officials from CSPF told us that, because they lacked the ability to significantly increase revenue or decrease accrued benefits, the named fiduciaries sought incrementally higher investment returns to meet funding thresholds required by the amortization extension they received in 2005.

On the other hand, there are challenges associated with risk bearing investments. In our prior work, we reported that multiemployer plans generally develop an assumed average rate of investment return and use that assumption to determine funding targets, required contributions, and the potential cost of benefit improvements. Experts we interviewed for that report told us that using a portfolio’s expected return to value the cost of benefits increases the risk that insufficient assets could be on hand when needed. They also told us that using the portfolio’s expected return to calculate liabilities could incentivize plans to invest in riskier assets and to negotiate higher benefit levels because the higher returns expected from riskier portfolios can result in lower reported liabilities.

Plan Terms Set through Collective Bargaining Stakeholders we interviewed said that plan terms, such as contribution rates, which are set through the collective bargaining process, can create an additional challenge for multiemployer plans. Employers in multiemployer plans generally are not required to contribute beyond what they have agreed to in collective bargaining, and these required employer contributions generally do not change during the term of a collective bargaining agreement. CSPF officials said that up until the early 2000s, plan officials did not request modifications to collective bargaining agreements, such as reallocating contribution dollars, to respond to adverse investment returns.

Investment Performance and Market Downturns

Stakeholders highlighted the effects of market downturns on multiemployer plan assets as another contributing factor to CSPF’s critical financial condition and that of other multiemployer plans. Failure to achieve assumed returns has the effect of increasing unfunded liabilities. For the multiemployer system in aggregate, the average annual return on plan assets over the 2002 to 2014 period was about 6.1 percent, well short of typical assumed returns of 7.0 or 7.5 percent in 2002.

Many multiemployer plans were especially impacted by the 2008 market downturn. PBGC estimated that from 2007 to 2009, the value of all multiemployer plan assets fell by approximately 24 percent, or $103 billion, after accounting for contributions to and payments from the plans. Although asset values recovered to some extent after 2009, some plans continued to be significantly underfunded, and stakeholders said this could be due to the contribution base not being sufficient to help recover from investment shortfalls.

CSPF’s investment performance since 2000 has reflected performance similar to other multiemployer plans and the plan went from 73 percent funded in 2000 to about 38 percent funded in 2017. While the plan used an assumed rate of return of 7.5 to 8.0 percent per year between 2000 and 2014, our analysis of the plan’s regulatory filings shows that the plan’s weighted-average investment return over this period was about 4.9 percent per year. CSPF officials said the 2008 downturn significantly reduced CSPF’s assets and it was unable to sufficiently recoup those losses when the market rebounded in 2009. Plan assets declined from $26.8 billion at the beginning of 2008 to $17.4 billion at the beginning of 2009, with $7.5 billion of the decline attributable to investment losses. Despite reporting a 26 percent return on assets during 2009, CSPF had only $19.5 billion in assets at the end of 2009 because benefits and expenses exceeded the contributions it collected and because it had fewer assets generating returns for the plan. By the end of 2009, CSPF’s funding target was $35.9 billion but the fund had less than $20 billion that could be used to generate investment returns. If CSPF’s portfolio had returned 7.5 percent per year over the 2000-2014 period, instead of the approximately 4.9 percent we calculated, we estimate that the portfolio value would have exceeded $32.0 billion at the end of 2014, or 91 percent of its Actuarial Accrued Liability.

Effect of UPS Withdrawal

In addition to the factors mentioned that affected many multiemployer plans, stakeholders we interviewed also noted the unique effect of the UPS withdrawal on CSPF. In 2007, UPS negotiated with the International Brotherhood of Teamsters for a withdrawal from CSPF and paid a withdrawal liability payment of $6.1 billion. This payment was invested just prior to the 2008 market downturn. Moreover, the loss of UPS, CSPF’s largest contributing employer, reduced the plan’s ability to collect needed contributions if the plan became more underfunded. A UPS official said that, following the market decline of 2001-2002, the company considered whether it should withdraw from all multiemployer plans because it did not want to be the sole contributing employer in any plan. According to this official, UPS considered the large number of UPS employees in CSPF and the plan’s demographics—such as an older population and fewer employers—in its decision to withdraw. CSPF officials said they did not want UPS to withdraw because its annual contributions accounted for about one-third of all contributions to the plan. CSPF officials also told us that, prior to the UPS withdrawal, they had expected the population of active UPS workers in the plan to grow over time.

UPS’ withdrawal of 30 percent of CSPF’s active workers, in combination with the significant market downturn just after UPS withdrew, reflected the loss of working members and investment challenges on a large scale. Additionally, stakeholders noted that although each of the factors that contributed to CSPF’s critical financial condition individually is important, their interrelated nature also had a cumulative effect on the plan. Industry deregulation, declines in collective bargaining, and the plan’s significantly underfunded financial condition all impaired CSPF’s ability to maintain a population of active workers sufficient to supply its need for contributions when investment shortfalls developed. Given historical rules for plan funding and industry stresses, CSPF was unable to capture adequate funding from participating employers either before or after they withdrew from the plan. The plan’s financial condition was further impaired when long-term investment performance fell short of expectations. For an underfunded, mature plan such as CSPF, the cumulative effect of these factors was described by some stakeholders as too much for CSPF to overcome.

CSPF’s Investment Policy Since 1982 Generally Increased Allocation to Equities, but Shifted Toward Fixed Income in 2017, Ahead of Projected Insolvency

There have been three distinct periods related to CSPF’s investment policy after the original consent decree took effect: the early period, from the consent decree’s effective date in September 1982 through October 1993, during which named fiduciaries set different investment policies and sold many of CSPF’s troubled assets—mostly real estate; a middle period from November 1993 through early 2017, during which CSPF’s investment policies were consistently weighted towards equities and its asset allocation varied, with notable equity allocation increases occurring from year-ends 1993-1995 and 2000-2002; and the current period, starting in January 2017, during which named fiduciaries and CSPF trustees are moving assets into fixed income ahead of insolvency.

Appendix I has a detailed timeline that includes changes to CSPF’s investment policies since the consent decree was established in 1982.

Early Period: September 1982–October 1993

The original consent decree placed exclusive responsibility for controlling and managing the plan’s assets with an independent asset manager, called a named fiduciary. Additionally, the original consent decree prohibited CSPF trustees from managing assets or making investment decisions and gave a single named fiduciary the authority to set and change the plan’s investment objectives and policies, subject to court approval (see fig. 8).

During this period, two successive named fiduciaries—first Equitable Life Assurance Society of the United States (Equitable) and then Morgan Stanley—set and executed the plan’s investment objectives using similar investment philosophies, but differing investment return goals and target asset allocations (see fig. 9). Both named fiduciaries planned to sell the plan’s troubled real estate assets from the pre-consent decree era. They also limited nonpublicly traded investments to 35 percent of the plan’s assets and set broad allocation targets for new real estate, fixed income, and equity assets. In 1984, Morgan Stanley considered a dedicated bond portfolio in its capacity as the plan’s named fiduciary, but after review, Morgan Stanley decided similar results could be obtained through other investment strategies.

In executing these policies, the plan’s asset allocation varied from year to year. Starting in 1987 and in subsequent years during the early period, Morgan Stanley invested a majority of the plan’s assets in fixed income assets—more than half of which were passively managed—and all equity assets were allocated to domestic equity through 1992. By 1989, CSPF officials reported that nearly all troubled real estate assets had been sold and Morgan Stanley’s responsibilities and risk of potential fiduciary liability were reduced, permitting a concomitant reduction in fees paid to the named fiduciary (see fig. 10).

Middle Period: November 1993–January 2017

CSPF’s Investment Policy

During the middle period, CSPF’s investment policy was broad and consistently directed that asset allocations be weighted toward equities. In 1993, Morgan Stanley revised its investment policy statement for CSPF to eliminate asset allocation targets for each asset class and instead specified that the plan invest a majority of assets in equity or equity-type securities and no more than 25 percent in nonpublicly traded assets. After 1999, CSPF’s investment policy under other, successive named fiduciaries continued to be broad and generally specified that the plan should invest a majority of assets in equity or equity-type securities. Specifically J.P. Morgan’s and Northern Trust’s consecutive investment policies for part of the plan’s assets continued to specify that a majority of the plan’s assets be invested in equity or equity-type securities and no more than 15 percent be invested in nonpublicly traded assets. Goldman Sachs’ investment policy for another part of the plan’s assets did not specify asset allocation details but indicated slightly higher tolerance for risk in conjunction with its equity portfolio. CSPF trustees said that named fiduciaries considered investing in alternative assets, but instead chose to increase the plan’s allocation to equity assets.

The named fiduciaries’ investment policies did not vary significantly over this period because CSPF officials said that the plan’s overarching investment objective of achieving full funding did not change, even though there were key changes to the plan’s investment management structure during this time period. Specifically, starting in 1999, the plan temporarily shifted to a dual named fiduciary structure and increased its use of passively-managed accounts—both described in detail below— changing the named fiduciary structure that had been in place since the original consent decree (see fig. 11).

More specifically, the two key changes to the plan’s investment management structure were:

A temporary shift to a dual named fiduciary structure. Effective in 1999, CSPF proposed and the court approved allocating plan assets between two named fiduciaries instead of one in order to diversify CSPF’s investment approach, among other things. Both named fiduciaries were in charge of setting and executing separate policies for plan assets they managed—called “Group A” and “Group B” assets—irrespective of the other named fiduciary’s allocations. During this time, the two named fiduciaries were J.P. Morgan/Northern Trust and Goldman Sachs. Specifically, J.P. Morgan was named fiduciary between 2000 and 2005 and Northern Trust between 2005 and 2007 for “Group A” assets. Goldman Sachs was named fiduciary for “Group B” assets between 2000 and 2010. In 2010, an investment consultant found the performance of two named fiduciaries under the dual named fiduciary structure had been similar and more expensive than it would be under a proposed move back to a single named fiduciary. Accordingly, CSPF officials proposed, and the court approved, consolidation of all assets allocated to named fiduciaries in August 2010, with Northern Trust as the plan’s single named fiduciary.

An increased use of passively-managed accounts. Between 2003 and 2010, the portion of assets that named fiduciaries managed declined as the plan moved 50 percent of its assets into three passively-managed accounts. Specifically, in 2003, 20 percent of CSPF’s assets were transitioned into a passively-managed domestic fixed income account to lower the plan’s investment management fees. In addition, both of the named fiduciaries reported that they had not outperformed the industry index for the domestic fixed income assets they managed after they were approved as named fiduciaries in 1999 and 2000 through February 2003. Similarly, in 2007 and 2010, CSPF officials said that two more passively-managed accounts were created to further reduce plan fees. Specifically, in 2007, 20 percent of plan assets were moved into a passively-managed domestic equity account. Then, in 2010, an additional 10 percent of the plan’s assets were allocated to passively-managed accounts—5 percent were allocated to a new passively-managed international equity account and 5 percent were added to the passively-managed domestic equity account.

CSPF officials and named fiduciary representatives also said that the plan’s investment policies did not change in response to a couple of the events that contributed to CSPF’s critical financial condition. For example, when UPS withdrew from the plan in December 2007, it paid $6.1 billion in a lump sum to fulfill its withdrawal liability. Consistent with the named fiduciaries’ investment policies during this time period, the majority of this withdrawal payment was invested in equity assets. Specifically, the court approved the UPS withdrawal liability payment to be allocated: $1 billion to Northern Trust to be invested primarily in short-term fixed income assets, $0.9 billion to the passively-managed domestic fixed income account, and $4.2 billion to partially fund the newly created passively- managed domestic equity account. As a result of the 2008 market downturn, the balance of each of CSPF’s accounts—Northern Trust’s named fiduciary account, the passively-managed domestic fixed income and domestic equity accounts, and Goldman Sachs’ named fiduciary account—declined because of investment losses or withdrawals from investment assets to pay benefits and expenses. Some of the declines in each account were reversed by investment gains in 2009.

Process for Setting and Executing CSPF’s Investment Policy

Although the changes made to CSPF’s investment management structure did not lead to investment policy changes during the middle period, they altered the process by which the policy was set and executed. In particular, trustee responsibilities in the policy process grew after CSPF trustees became responsible for developing investment policy statements and selecting and overseeing managers of the passively-managed accounts, subject to court approval. In addition, CSPF officials said the addition of passively-managed accounts between 2003 and 2010 had the effect of creating broad bounds within which the named fiduciary could set the plan’s asset allocation. For example, when the plan moved 20 percent of total plan assets into the passively-managed domestic fixed income account in 2003, this placed an upper bound on the plan’s total equity allocation at 80 percent. Similarly, since 2010 the 30 percent of total plan assets in passively-managed equity accounts has placed a lower bound on the plan’s total equity allocation at 30 percent (see fig. 12).

Nevertheless, named fiduciaries maintained the largest role in setting and executing CSPF’s investment policy throughout the middle period. From 1993 to 2003, named fiduciaries managed all of the plan’s investment assets, and from 2003 to 2009, when the plan added two of the current passively-managed accounts, named fiduciaries still held the majority of the plan’s assets. It has only been since 2010 that the assets in passively-managed accounts equaled those managed by the named fiduciary. Furthermore, Northern Trust representatives said they considered the plan’s allocations to passively-managed accounts when developing the objectives and target asset allocations for the assets they managed. Northern Trust representatives also said they discussed the plan’s overall asset allocation with trustees, but the trustees, and ultimately the court, were responsible for the decision to move 50 percent of the plan’s assets into passively-managed accounts.

Asset Allocation under CSPF’s Investment Policy

After the 1993 policy change that specified the plan would invest a majority of assets in equity or equity-type securities, CSPF’s asset allocation changed significantly. For example, during the middle period the plan’s allocation to equities increased from 37 percent at the end of 1993 to 69 percent at the end of 2002, and its allocation to cash plus fixed income decreased from 63 percent at the end of 1993 to 27 percent at the end of 2002. In particular, Morgan Stanley increased the plan’s allocation to equity assets from 37 percent at the end of 1993 to 63 percent at the end of 1995, with the percentage in equities almost or above 50 percent through the end of 1999. From 1993 through 1999, Morgan Stanley generally decreased the plan’s allocation to fixed income assets and increased its allocation to international equity (reaching a high of about 28 percent of the plan’s assets in 1995), an asset class in which the plan had not previously invested (see fig. 13).

After 1999, the plan’s asset allocation continued to be weighted towards equities. After the market downturn in 2001, CSPF trustees told us that J.P. Morgan and Goldman Sachs explicitly increased the equity allocation in an attempt to generate higher investment returns and increase the plan’s funded ratio—the plan’s overarching investment objective. Between 2000 and mid-2010, when the plan had two named fiduciaries, equity assets increased from about 58 percent at the end of 2000 to between 66 and 70 percent at the end of 2001 and each year thereafter until the end of 2009, mostly based on the named fiduciaries’ decisions to increase the plan’s allocation to domestic equity assets. When Northern Trust became the sole named fiduciary in 2010, the proportion of equity assets declined from almost 72 percent at the end of 2010 to almost 63 percent at the end of 2016. During this time, Northern Trust generally decreased the plan’s allocation to domestic equity assets, increased the allocation to actively-managed fixed income, and started investing in global infrastructure assets. Northern Trust representatives said CSPF’s recent portfolio had been kept relatively aggressive in an attempt to achieve the returns the plan would need to become fully funded while balancing risk (see fig. 14).

Current Period: January 2017 – Present

CSPF’s deteriorating financial condition precipitated a recent investment policy change that will move plan assets into fixed income and cash equivalent investments ahead of projected insolvency. In early 2017, Northern Trust representatives revised the plan’s investment policy because they, in consultation with the trustees, believed the plan had no additional options to avoid insolvency (see textbox). This change to the plan’s outlook led to a significant change in the plan’s investment objective, from a goal of fully funding the plan to instead forestalling insolvency as long as possible while reducing the volatility of the plan’s funding. Northern Trust representatives and CSPF officials revised applicable plan investment policy statements and started to gradually transition the plan’s “return seeking assets”—such as equities and high yield and emerging markets debt—to high quality investment grade debt and U.S. Treasury securities with intermediate and short-term maturities. Northern Trust’s new investment policy specified the assets under its control would not be invested in nonpublicly traded securities, in order to manage risk and provide liquidity.

CSPF Has Limited Options to Achieve Solvency As of March 2018, the Central States, Southeast and Southwest Areas Pension Fund (CSPF) was projected to be insolvent on January 1, 2025. As of July 2017, CSPF officials said that the following measures (in isolation) could help the plan avoid insolvency:

18 percent year-over-year investment returns (infinite horizon), or

250 percent contribution increases (with no employer attrition), or

46 percent across-the-board benefit cut.

However, CSPF officials said that investment returns and contribution increases of these magnitudes were untenable, and CSPF’s application to reduce accrued benefits under the Multiemployer Pension Reform Act of 2014 (MPRA) was denied in 2016.

CSPF officials and Northern Trust representatives said these asset allocation changes are intended to provide participants greater certainty regarding their benefits and reduce the plan’s exposure to market risk and volatility until it is projected to become insolvent on January 1, 2025 (see fig. 15).

Northern Trust is expected to continue to manage 50 percent of the plan’s investment assets until the plan becomes insolvent. While the total amount of assets in the passively-managed accounts will continue to constitute 50 percent of the plan’s assets, the trustees plan to transfer assets from the passively-managed domestic and international equity accounts into the passively-managed domestic fixed income account, which will be gradually transitioned to shorter-term or cash-equivalent fixed-income securities sometime before the end of March 2020 (see fig. 16).

CSPF officials said the changes will reduce the amount of fees and transaction costs paid by the plan. Specifically, investment management fees are expected to generally decrease as the plan moves into shorter duration fixed income assets. In addition, Northern Trust’s plan is designed to reduce transaction costs in two ways: (1) in the near term, Northern Trust plans to liquidate “return-seeking assets” so the cash it receives can be used directly to pay benefits, and (2) it plans to synchronize the fund’s benefit payments with the maturity dates of fixed income assets it purchases so cash received can be used directly to pay benefits. Both of these design features are intended to eliminate the need to reinvest assets, which might entail additional transaction costs.

Available Data Show That CSPF Investment Returns and Fees Were Generally Comparable to Similar Plans

Our analysis of available data from several different sources shows the returns on CSPF’s investments and the fees related to investment management and other plan administration activities appear generally in line with similar pension plans or other large institutional investors of similar size.

CSPF’s Investment Return History is in Line with Other Funds and Plans

CSPF Investment Returns Compared to Other Large Institutional Funds

The annual returns on CSPF’s investments in recent decades have generally been in line with the annual returns of a customized peer group provided by the investment consultant Wilshire. The comparison group data is from Wilshire’s Trust Universe Comparison Service (TUCS)—a tool used by CSPF to compare its investment returns to a group of peers. Over the 22 years covered by our analysis, CSPF’s returns were above the median in 12 years and below the median the other 10. Figure 17 illustrates how CSPF’s annual investment returns compare to CSPF’s customized peer group of master trusts with over $3 billion in assets.

CSPF’s annual investment returns tended to fluctuate relative to the annual median of the TUCS peer group over the 1995 through 2016 period. For example, in 14 of the 22 years analyzed, its annual return was in the highest or lowest 25 percent of returns (7 years each). Further, in 3 years, its investment returns fell either within the top 5 percent of returns (1996, 2009) or bottom 5 percent (1998). In 8 of the 22 years, CSPF’s annual return was within the middle 50 percent of its TUCS peer group.

The TUCS data we analyzed also included median portfolio allocations for the group of CSPF’s peers. Table 2 compares CSPF’s asset allocations for selected asset categories to the median allocations of its TUCS comparator group.

In 1996, compared to the TUCS medians, CSPF had relatively lower proportions of its assets in both equities and fixed income and a relatively higher proportion in real estate. Twenty years later (2016), CSPF had relatively higher proportions of its assets in both equities and fixed income (about 15 and 7 percentage points, respectively) than the respective medians for its peer group. However, the relatively large difference between CSPF’s 2016 equity allocation and the median allocation of its peer group may be a result of the peers moving into different asset classes. For example, there is a relatively large difference, in the other direction, in the allocation to alternative investments (see table 2). We did not identify an alternative asset category in CSPF’s asset reports for 2016, but the TUCS comparator group median asset allocation in that year is 11.8 percent of assets.

CSPF Investment Returns Compared to Other Similar Multiemployer Plans

Similar to our findings when comparing the returns on CSPF’s investments to a customized peer group of other large institutional funds, the annual returns on CSPF’s investments in recent decades have also generally been in line with the annual returns for a group of similar multiemployer pension plans. To create a group of comparable plans, we selected plans that had a similar degree of “maturity” to CSPF in 2000, as such plans may face similar cash flow challenges to those facing CSPF. This comparator group ultimately consisted of 15 plans in addition to CSPF. Relative to less mature plans, mature plans generally have a greater proportion of liabilities attributable to retired participants receiving benefit payments and a lower proportion attributable to active participants (i.e., workers) earning benefits. Mature plans may have limited capacity to make up for insufficient investment returns through employer contributions.

Similar to the comparison against other large institutional fund returns based on TUCS data, our comparison against other mature multiemployer plan returns based on Form 5500 data shows that CSPF’s annual returns fluctuate relative to the median annual return for the mature plan comparator group (see fig. 18). For example, in 12 of the 15 years, CSPF’s annual return was in the highest or lowest 25 percent of returns (7 times high and 5 times low). In 3 of the 15 years analyzed, CSPF’s annual return fell within the middle 50 percent of the peer group. Overall, from 2000 to 2014, CSPF’s annual return was above the group median return in 9 of the 15 years—and lower than the median return in the other 6 years. Relative to its peers, CSPF’s annual returns performed worst during economic downturns and best in years coming out of such downturns. CSPF’s annual investment return was in the bottom 10 percent of returns in 2001, 2002, and 2008. Alternatively, its annual return was in the top 10 percent of returns from 2003 to 2006, in 2009, and in 2012.

Additionally, the dollar-weighted average annual return for CSPF over the 2000 through 2014 period was roughly the same as the median for the mature plan comparison group. Specifically, the dollar-weighted average annual return over this period for CSPF was roughly 4.9 percent, while the median dollar-weighted average annual return over this period among the comparison plans with continuous data was 4.8 percent.

Our analysis of investment returns for mature plans compares investment returns for a set of peers that includes only multiemployer defined benefit plans. However, as with the comparison against other large institutional funds, the comparisons against other mature plans are not measures of over- or under-performance relative to an index or benchmark. Similarly, as with the earlier comparison, the analysis does not account for variations in the levels of investment risk taken by the plans.

Fees and Expenses Paid by CSPF Were Similar to Other Large Multiemployer Plans

Our analysis of Form 5500 data shows CSPF’s investment fees and administrative expenses were in line with other large multiemployer plans. Plan investment fees and administrative expenses are often paid from plan assets so many plans seek to keep these fees and expenses low. Additionally, investment fees are likely to be related to the value of assets under management, and plans with greater asset values tend to be able to negotiate more advantageous fee rates. According to a pension consultant and a DOL publication, investment management fees are typically a large defined benefit plan’s largest category of expense, but a pension plan also incurs a number of lesser expenses related to administering the plan. Administrative expenses (other than investment fees) may include those for: audit and bookkeeping/accounting services; legal services to the plan (opinions, litigation and advice); administrative services provided by contractors; plan staff salaries and expenses; plan overhead and supplies; and other miscellaneous expenses.

These administrative expenses relate to plan operations beyond the management of the assets, including the day-to-day expenses for basic administrative services such as participant services and record keeping. Furthermore, some of these expenses can vary based on the number of participants in the plan. To compare CSPF’s fees and expenses against similarly sized plans, we tallied various investment fee-related and other administrative expenses and compared CSPF to a group of multiemployer defined benefit plans that were among the 19 largest plans in terms of assets as of January 1, 2014.

According to CSPF’s 2014 Form 5500, CSPF spent about $46.5 million on investment fees (or $47.6 million in 2016 dollars) and had about $17.4 billion in assets (or $17.8 billion in 2016 dollars) as of the end of the year—resulting in an investment fee expense ratio of about 27 basis points, or 0.27 percent. Over the 2000 to 2014 period, CSPF’s average annual investment fee expense ratio was 34 basis points (0.34 percent) while the median of the averages for our large plan comparison group was 37 basis points (0.37 percent). While CSPF’s average investment fee expense ratio was below the median for its comparison group over the period we examined, the relationship of CSPF’s annual ratio to the annual median changed over time. CSPF’s annual investment-fee expense ratio was consistently at or above the median from 2000 through 2006, but was below the median thereafter. In addition, CSPF’s average investment fee expenses over the period that followed 2006 were 26 percent less than the average over the period before 2007. (They averaged 39 basis points, or 0.39 percent, from 2000 through 2006 and 29 basis points, or 0.29 percent, from 2007 through 2014.) Two events may have contributed to this change. First, CSPF introduced the passively-managed accounts beginning in 2003—as noted earlier, and CSPF moved certain assets to those accounts in an effort to reduce fees. Second, the change back to a single named fiduciary, which was suggested as an expense saving move, occurred in the middle of the 2007 to 2014 period analyzed. Figure 19 illustrates how CSPF’s investment fee expense ratio compares to other large plans.

Our analysis uses investment fee data reported in the Form 5500 that does not include details about the sources of the fees. Investment fees may be sensitive to a plan’s particular investment strategy and the way assets are allocated. For example, with CSPF, a named fiduciary has responsibility for executing the investment strategy and allocations. According to a representative from Northern Trust—the current named fiduciary—CSPF pays a fee of about 5 basis points for named fiduciary services, and this, combined with investment management fees, is in line with investment fees for other clients (though the overall fees depend on the types of asset allocations and investment strategies).

Figure 20 shows how CSPF’s administrative (or non-investment) expenses compare to those of other large plans on a per participant basis. According to CSPF’s 2014 Form 5500, CSPF spent about $38 million on administrative expenses ($39 million in 2016 dollars)—the third most among the 20 peer plans. However, when these expenses are expressed relative to the number of plan participants, CSPF had per participant expenses of $98 in 2014, which is about 16 percent less than the median of the large comparator group, $117. Over the period studied, CSPF’s administrative expenses per participant were at or above the large comparator median in 3 years (2001, 2004, and 2005), but lower than the median in all other years of the 2000 to 2014 period.

CSPF’s administrative expenses were also in line with a broader group of comparators. For example, PBGC reported on 2014 administrative expenses of a population of large multiemployer plans (plans with more than 5,000 participants). By closely replicating the methodology of that study, we found CSPF’s expenses of $98 per participant in 2014 fell below the median expense rate of $124 dollars per participant but above the lowest quartile of this group of large multiemployer plans. In comparing administrative expenses as a percentage of benefits paid, we found CSPF’s administrative expenses were among the lowest 5 percent of this group of large multiemployer plans. We performed a similar comparison against the peer group of large plans. CSPF had the lowest administrative expense rate among the large plan peer group in 2014, paying administrative expenses at a rate of 1.4 percent of benefits paid. In addition, CSPF’s annual administrative expenses as a percentage of benefits were below the median of our peer group of large plans in all years we reviewed.

Our analysis of administrative expenses is highly summarized and does not account for possibly unique sources of administrative expenses. Plans may have unique organizational structures and attribute expenses differently. For example, one plan may contract a significant portion of administrative duties with a third-party, while another plan may administer the plan in-house. According to an actuary we interviewed, most multiemployer plans are administered by a third-party, but the plan’s in- house staff will still retain a number of duties. Additionally, the amount of individual administrative expenses could vary significantly by plan depending on the importance of the related administrative function in the plan’s organization.

Agency Comments and Our Evaluation

We provided a draft of the report to the U.S. Department of Labor, U.S. Department of the Treasury, and the Pension Benefit Guaranty Corporation for review and comment. We received technical comments from the U.S. Department of Labor and the Pension Benefit Guaranty Corporation, which we incorporated as appropriate. The U.S. Department of the Treasury provided no comments.

We will send copies to the appropriate congressional committees, the Secretary of Labor, the Secretary of the Treasury, Director of the Pension Benefit Guaranty Corporation, and other interested parties. This report will be available at no charge on the GAO website at http://www.gao.gov.

If you or your staff have any questions about this report, please contact Charles Jeszeck at (202) 512-7215 or jeszeckc@gao.gov or Frank Todisco at (202) 512-2700 or todiscof@gao.gov. Mr. Todisco meets the qualification standards of the American Academy of Actuaries to address the actuarial issues contained in this report. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix IV.

Appendix I: Objectives, Scope, and Methodology

Our objectives were to review: (1) what is known about the factors that contributed to the Central States, Southeast and Southwest Areas Pension Fund’s (CSPF) critical financial condition; (2) what has been CSPF’s investment policy, and the process for setting and executing it, since the consent decree was established; and (3) how has CSPF performed over time, particularly compared to similar pension plans.

For all objectives, we reviewed relevant federal laws and regulations, literature, and documentation the U.S. Department of Labor (DOL) and CSPF officials provided, including reports prepared by the court- appointed independent special counsel. We interviewed knowledgeable industry stakeholders, participant advocates, CSPF officials, International Brotherhood of Teamsters officials and members, and federal officials— including officials from the Pension Benefit Guaranty Corporation (PBGC), DOL, and the U.S. Department of the Treasury (Treasury).

To describe the major factors that led to CSPF’s critical financial condition, we conducted semi-structured interviews and reviewed CSPF documentation, relevant scholarly materials, trade and industry articles, government reports, conference papers, research publications, and working papers. We also collected actuarial, financial, and other data on current and historical measures of plan assets, liabilities, investment performance, and other factors, and performed our own analyses of these data. The data and documentation collected were generally from the plan or agencies that oversee pensions. We determined the information to be generally reliable for the purposes of our objectives.

To describe CSPF’s investment policy and the process by which it was set and executed we (1) reviewed CSPF’s investment policy statements, court orders and consent decree amendments, and other documentation provided by CSPF officials; (2) interviewed CSPF officials, including pension plan staff, the board of trustees, and the investment advisor, and representatives of the named fiduciary serving the plan at the time of our review; and (3) summarized certain aspects of CSPF’s assets using year- end performance reports prepared by the named fiduciaries.

To describe how CSPF has performed over time compared to similar pension plans, we analyzed investment and fee data from DOL’s Form 5500, the government’s primary source of pension information. We also examined CSPF’s investment returns in comparison to a customized Wilshire Associates’ (Wilshire) Trust Universe Comparison Service (TUCS) benchmark of trusts with $3 billion or more in assets. CSPF provided these data and the data are included in the independent special counsel reports. Wilshire provided supplemental data using the same benchmark specifications.

CSPF and DOL Document Reviews

We reviewed three types of documentation provided by CSPF for changes in named fiduciaries; changes in investment policy, strategy, and asset allocation; major issues that affected funding; and how these issues affected CSPF’s investment strategy and policy.

Select independent special counsel reports. CSPF officials provided 4th quarter reports for each year from 1982 through 2002 and available quarterly reports from 2003 through 2007. We downloaded all available quarterly reports from 2008 through 2017 from CSPF’s website.

Select board of trustee meeting minutes. We requested board of trustee meeting minutes from 1983, 1994-95, 1998-2005, 2007-2010, and 2016 so we could review trustee discussions from the first full year the plan was covered by the 1982 consent decree, the most recent full year; periods that included a recession and/or when the plan’s assets performed poorly; and periods that preceded a change or reappointment of the named fiduciary. CSPF officials selected portions of the trustee meeting minutes from those years that pertained to the following topics: named fiduciary reports concerning investment performance; discussions relating to the amortization extension the Internal Revenue Service (IRS) granted to the plan and the contribution rate increases the plan required of participating employers in an effort to comply with funding targets required as condition of the IRS-approved amortization extension; major amendments to the plan; significant reports concerning the plan’s financial condition; amendments to the consent decree; discussions relating to any inquiries or issues DOL raised; discussions of named fiduciary appointments or resignations; discussions of particularly significant contributing employer delinquencies, bankruptcies, and settlements; and discussions relating to the independent special counsel. In addition to the board of trustee meeting minutes, CSPF officials provided select documentation on similar topics a former secretary of the board of trustees retained (1995 through 2008).

Select correspondence between CSPF and DOL. CSPF officials provided select correspondence with DOL from 1987 through 2017 relating to DOL’s oversight of the plan. CSPF officials said they provided all records of those communications that related to significant, substantive, and nonroutine issues. The correspondence excluded other documents, such as periodic reports concerning asset rebalancing and correspondence related to fairly noncontroversial motions to the consent decree.

In addition, DOL provided documentation throughout the course of our engagement, including documentation it provided between September and October 2017 that it had not previously identified as being relevant to our review. We completed an on-site file review at DOL in September 2017, and DOL sent us additional electronic documentation in September and October 2017. Overall, we reviewed extensive documentation from DOL—spanning over 10,000 pages of paper-based and electronic files— and spent substantial time cataloging and categorizing it. However, DOL officials reported that certain documentation related to CSPF was no longer available because it had only been retained for the time specified in the records retention policy of the relevant office.

Semi-structured Interviews

We conducted 23 semi-structured interviews with federal agency officials and other stakeholders, including affected parties, and persons knowledgeable about unions, participants and retirees, the trucking industry, collective bargaining agreements, and multiemployer pension plans. We also interviewed three stakeholders with actuarial expertise to specifically understand actuarial standards and procedures. We selected knowledgeable stakeholders based on review of literature and prior GAO work, and recommendations from other stakeholders. We judgmentally selected stakeholders whose expertise coincided with the scope of our objectives and who would be able to provide a broad range of perspectives. In our semi-structured interviews we asked about key factors affecting the plan, the broader regulatory and financial environment in which multiemployer plans operate, and solvency options for plans like CSPF.

Investment Policy Statement Review

We reviewed CSPF’s investment policy statements after CSPF entered into a consent decree in 1982, most of which are documented in the consent decree or other court orders. Seven of the investment policy statements were developed by named fiduciaries in consultation with the plan’s board of trustees and four were developed by the trustees. (See fig. 21.)

From each investment policy statement, we compiled relevant information on: (1) investment philosophy and plan characteristics considered in developing it, (2) investment return benchmarks, (3) asset allocation, and (4) strategies and assets. See table 3 for select asset allocation information.

Asset Summary

To describe how CSPF’s investment policy was executed, we compiled information from performance reports prepared by named fiduciaries. We reported CSPF’s asset allocation generally based on the aggregate asset allocation categories CSPF’s named fiduciaries assigned in those reports. CSPF provided these reports for the end of each year 1984 through 2016—except 1992 and 1995, for which it provided reports as of the end of November. Information we compiled included the plan’s: account breakdown (i.e., assets in named fiduciary and passively- asset allocation; and investment assets withdrawn to pay benefits and administrative expenses.

When possible, we checked the information from year-end performance reports against that in other sources. Specifically, to ensure we captured the vast majority of the plan’s assets in our asset summary we compared the total amount of plan assets named fiduciaries reported with Net Assets reported in CSPF’s Form 5500 filings, available from 1982 through 2016. We generally found these totals to be similar for each year—in most years the difference was about or under 1 percent. Also, named fiduciary performance reports included information on withdrawals from investment assets to meet pension and administrative expense obligations as of the end of each year, except for 1995 and 1999-present. For 1995 through 2016, we compiled this information from independent special counsel reports. For years in which we had overlapping information, 1996 through 1998, we found the reported totals were similar—no more than about 0.6 percent difference in each of those years. Based on our review we believe that the differences were insignificant to our overall analysis and did not impact our findings.

Form 5500 Data Analysis

To determine investment returns, investment fees, and administrative expenses for CSPF and related comparator group multiemployer defined benefit plans, we analyzed electronic Form 5500 information, the primary, federal source of private pension data. We analyzed information from 2000 through 2014, the most current and complete year at the time we performed our analysis. We began our analysis with 2000 data as data on investment returns and plan fees is primarily found in the Schedule H. Schedule H information was first collected in 1999. But we begin our analysis with 2000 data as electronic data became more reliable the year after the schedule was introduced.

We have previously reported on the problems associated with the electronic data of the Form 5500. To mitigate problems associated with the data, we used Form 5500 research data from PBGC. PBGC analysts routinely and systematically correct the raw 5500 data submitted by plans, and PBGC’s Form 5500 research data are thought to be the most accurate electronic versions. Although we did not independently audit the veracity of the PBGC data, we took steps to assess the reliability of the data and determined the data to be sufficiently reliable for our purposes. For example, we performed computer analyses of the data and identified inconsistencies and other indications of error and took steps to correct inconsistencies or errors. A second analyst checked all computer analyses.

Funded Status

Funded status is a comparison of plan assets to plan liabilities. One measure of funded status is the funded percentage, which is calculated by dividing plan assets by plan liabilities. Another measure of funded status is the dollar amount of difference between plan assets and plan liabilities; the excess of plan liabilities over plan assets is the unfunded liability (or surplus if assets exceed liabilities). In this report, we measured funded status using the Actuarial Value of Assets and the Actuarial Accrued Liability, which are the basic measures used to determine the annual required minimum contribution for multiemployer plans under ERISA. We chose these measures because of the consistent availability of data for these measures. There are other ways to measure plan assets and plan liabilities. The Actuarial Value of Assets can be a “smoothed” value that differs from the market value of plan assets. The Actuarial Accrued Liability depends on the choice of actuarial cost method and discount rate, and on whether it is determined on an ongoing plan basis or a plan close-out basis. While different measures of plan assets and liabilities will produce different measures of funded status at any particular point in time, we found that our use of the Actuarial Value of Assets and the Actuarial Accrued Liability was sufficient for our purposes, which included examining the plan’s progress relative to statutory funding standards as well as its trend over time.

Comparator Group Construction

We developed multiple comparison groups for our analysis. The general rationale behind these comparator groups is to identify plans with similar fundamental characteristics, such as plan size or plan maturity, for purposes of investment return and fee and expense comparisons. We created the following two comparator groups: 1. Large plans (in terms of assets). We ordered multiemployer defined benefit plans by descending 2014 plan assets (line 2a of the 2014 of the Schedule MB). Because one of our key analyses of the data involves comparing investment returns across plans, we also limited the comparable plans to those that share a common plan year to CSPF (specifically if they have the same plan year-end of December 31). We selected the 20 plans that had the largest plan asset values. This includes CSPF, which was the second largest multiemployer plan as of the beginning of 2014. Because these comparator plans are among the largest, they should have similar cost advantages. For example, for investment management services, they should have similar advantages in obtaining lower fees and thus garner greater net returns due to the more favorable fee structures. 2. Mature plans (in terms of retiree liability proportions). We ordered multiemployer defined benefit plans by their similarity to CSPF’s ratio of retiree to total liabilities as of the beginning of calendar year 2000. The ratio of retiree to total liabilities is defined as line 2(b)1(3) of the 2000 Schedule B divided by total liabilities of line 2(b)4(3) of the 2000 Schedule B. To compare retiree to total liability ratios, we created a variable for the absolute value of the difference between CSPF’s ratio and that of a given plan. We ordered the plans by ascending differences in the ratios (excluding any with missing differences). CSPF was the top plan because its difference is zero by definition. Because one of our key analyses of the data involved comparing investment returns across plans, we also limited the comparable plans to those that shared a common plan year with CSPF (specifically if they have the same plan year-end of December 31). Of the plans that had the same plan year as CSPF and assets over $300 million, we selected the 20 plans (including CSPF) that had the smallest absolute difference from CSPF in the retiree-to-total liability ratio. Plans with a high ratio of liabilities attributable to retirees will have a relatively large portion of future benefit payments attributable to those that are older and retired. By selecting plans that were similarly mature to CSPF (and had $300 million in assets as of the beginning of 2000), we identified plans that may have had a similar basis for their plan investments, similar cash flow characteristics, or similar potential deviations between time-weighted and dollar-weighted average investment returns over time (see section below entitled “Calculation of Average Investment Return over Multiple Years”). That is, these plans should have roughly similar cost advantages and similar considerations in their investment objectives such as the balance of cash flows into and out of the fund and the plans’ investment horizons. Similarity in the balance of cash flows is important because it helps to mitigate the influence of plan maturity on the weighted average investment return over multiple years. The year 2000 was used to select the group because the primary purpose of this group is comparison of investment returns for plans that are similarly situated at the beginning of the period being analyzed.

Calculations of Annual Investment Returns

Our calculation of investment returns is based on the investment return calculation expressed in the Form 5500 instructions for the Schedule MB. Specifically the instructions of the 2014 Schedule MB state: Enter the estimated rate of return on the current value of plan assets for the 1-year period ending on the valuation date. (The current value is the same as the fair market value—see line 1b(1) instructions.) For this purpose, the rate of return is determined by using the formula 2I/(A + B – I), where I is the dollar amount of the investment return, A is the current value of the assets 1 year ago, and B is the current value of the assets on the current valuation date. Enter rates to the nearest .1 percent. If entering a negative number, enter a minus sign (“ - “) to the left of the number.

After preliminary analysis of the variable and consultation with a GAO senior actuary, we determined that Form 5500, Schedule H contains all the information necessary to derive the calculation for years prior to 2008—as far back as 1999 when the Schedule H first came into existence. Additionally, we made adjustments for the timing of cash flows, to the extent indicated by the data. For example, employer and employee contributions that were considered receivable at the end of the prior year and thus included in the Schedule MB calculation were instead included in the year when the plan received the cash for the contribution. Thus, our calculation of annual rate of return is expressed as line items of the 2014 Schedule H to be: 2 * / [[{item1(f)a} – {item 1(b)1(a)} - {item 1(b)2(a)} - {item 1j(a)}] + [{item1(f)b} – {item 1(b)1(b)} - {item 1(b)2(b)} - {item 1j(b)}] – [{item 2d} - {item 2a(3)} – {item 2c}]] Or expressed with expository names as: (2 * (TLINCOME - TOTLCON - OTHERINCOMEW)) / ((TASSTSBY - (ERCONBOY + EECONBOY + OTHER_LIAB_BOY_AMT)) + (TASSTSEY - (ERCONEOY + EECONEOY + OTHER_LIAB_EOY_AMT)) - (TLINCOME - TOTLCON - OTHERINCOMEW))

For purposes of data reliability and validation of our results, we ran permutations of the calculation to see how, if at all, certain items could influence the calculation. In two permutations, we changed the timing of net asset transfers to or from other plans. (This occurs when, for example, there is a plan merger.) A senior actuary determined whether the calculations with/without net asset transfers affected our calculation. If the timing of the net transfer caused the investment return calculation to vary by more than 0.1 percent, we excluded the data for that particular plan in that particular year. We also ran another calculation that did not include “other” income so we could estimate the impact of not adjusting for such information.

Calculation of Average Investment Return over Multiple Years

Historical average investment returns over multiple years can be calculated in at least two different ways. One measure is the “time- weighted” average return, calculated as a geometric average of the annual returns during the period. A time-weighted average measures average investment performance without regard to the order of the annual returns or the impact of different plan circumstances over time. Another measure is the “dollar-weighted” average return–also known as the “internal rate of return” (and also referred to as the “cash flow weighted” return in this report)—which reflects the impact of the plan’s cash flow pattern. The dollar-weighted average return is the rate that, when applied over time to the asset value at the beginning of the period and to each year’s net cash flow into or out of the plan over the period, reproduces the asset value at the end of the period.

We calculated dollar-weighted average returns (along with some time- weighted returns for comparison), for both CSPF and for the multiemployer system as a whole, as discussed in the report. We used a market value of plan assets for this purpose. The dollar-weighted average captures the impact of negative cash flow on average investment return. For example, with negative cash flow, investment results in an earlier year can have a bigger impact than investment results in a later year because more money is at stake in the earlier year.

Using the same beginning-of-period asset value, and subsequent annual net cash flows into or out of the plan, used in calculating the dollar- weighted average return, we also performed a hypothetical calculation of what CSPF’s end-of-period asset value would have been if the plan had earned 7.5 percent per year instead of its actual return.

Calculation of Fees and Expenses

Conceptually, there are multiple ways to express investment fees, but our analysis used the following two methods for calculating them: Investment fee ratio. Investment fees [line 2i(3) of the 2014 Schedule H] divided by end-of-year net assets [line 1l(b) of the 2014 Schedule H] less receivables [line 1b(1)(b); line 1b(2)(b); and line 1b(3)(b) of the 2014 Schedule H].

Investment fees per participant. Investment fees [line 2i(3) of the 2014 Schedule H] divided by total (end-of-year) participants [line 6f of the 2014 main form].

Administrative Expense Calculations

We define administrative expenses as all other expenses besides investment fees. In part, we used this definition of administrative expenses as it represents the expenses that remain after excluding investment fees. In addition, according to a PBGC analyst, this is the unit of analysis that they also used in their study of administrative expenses.

Administrative expense to benefits paid. This is administrative expenses (professional, contract and other) divided by benefits paid. For administrative expenses we derived the value by taking total expenses less investment fees . For benefits paid, we used the 2014 Schedule H, line 2e(1), “Benefit payment and payments to provide benefits directly to participants or beneficiaries, including direct rollovers.” However, if the benefit payment value for such payments is missing or zero, we used the 2014 Schedule H, line 2e(4) “Total Benefit Payments” since the plan may be expressing their benefit payments on another line.

Administrative expense per participant. Administrative expenses (professional, contract and other) divided by total (end-of-year) participants . For administrative expenses we derived the value by taking total expenses [line 2i(5) of the 2014 Schedule H] less investment fees [line 2i(3) of the 2014 Schedule H].

PBGC Study on Administrative Expenses PBGC has reported on administrative expenses and included various breakouts of these data in past data book supplements. The calculations of administrative expenses in this report are similar to those used by PBGC. Certain differences may exist because our calculation did not include certain multiemployer plans that reported missing data. Additionally, our population of multiemployer plans included only those plans exclusively associated with defined benefit features. The table below compares our results for plans with 5,000 or more participants, which is a subset of plans analyzed in the PBGC study.

Our results used a sample that includes three fewer plans than the PBGC study, but our distributional results were within one-tenth percent for the administrative expense ratio and within $5 of the administrative expenses per participant (see table 4).

Comparing the administrative expenses across reports using other statistics such as the minimum, maximum and standard deviation shows similar results for the PBGC and our analysis (see table 5). The mean administrative expenses per participant differ by $2.47. This difference is 1.5 percent lower than the PBGC estimate and could be a result of the difference in sample size.

We also performed additional analyses as summarized below.

We compared CSPF’s annual returns against plans that have the largest assets among multiemployer defined benefit plans (with the same plan year as CSPF) and CSPF’s results against these plans were broadly similar to results for the mature plans (see fig. 22).

We compared CSPF’s administrative expenses as a percentage of benefit paid against other large plans. As noted in this report, CSPF has the lowest relative administrative expenses among the comparators in 2014 with administrative expenses at 1.4 percent of benefits (see fig. 23).

In addition, CSPF’s administrative expenses as a percentage of benefits were consistently below the median.

Analysis of Wilshire TUCS Data

For our analysis of Wilshire TUCS data, we used two sources of data. Data from 1999 through 2016 was provided by CSPF. CSPF provided reports of their TUCS custom comparison group, master trusts with greater than $3 billion in assets. These data also included the year-end return results for the total fund (also known as the combined fund) as well as returns by subcategory such as a specific named fiduciary or fund. For example, subcategories listed for year-end 2006 included the results for both named fiduciaries (Goldman Sachs and Northern Trust) as well as the passively-managed accounts (then known as the CSSS fund).

The custom comparison groups for the 1999 through 2016 data were determined each year in early-February of the year following the December 31 return results for the prior year. Thus, over time more master trusts were added (or subtracted) depending on the level of assets for the master trusts in that year. For example, the return results for year- end 1999 are determined as of February 10, 2000 and the group of master trusts with more than $3 billion contains 62 observations. The number of trusts in the custom group of master trusts with more than $3 billion generally grew over time with the number peaking with the return results for year-end 2014 (determined as of February 9, 2015), which contains 124 observations.

The TUCS data from 1995 through 1998 was provided by Wilshire. The comparison group for these data were not selected each year, but, instead, selected retrospectively. For example, the comparison group of master trusts with more than $3 billion from 1995 through 1998 was selected as of January 9, 2017. There were 99 reported observations in 1995 and 132 observations in 1998. In addition, the 1995 through 1998 TUCS data did not include specific returns for CSPF. We were able to find the annual year-end return in the December (i.e. year-end) management report, which for these years was provided by the named fiduciary, Morgan Stanley.

Appendix II: Selected Events Affecting the Central States, Southeast and Southwest Areas Pension Fund

Below is a list of selected events that have affected the Central States, Southeast and Southwest Areas Pension Fund (CSPF) as identified through a review of relevant documentation and interviews with stakeholders and agency officials. It is not intended to be an exhaustive list of the events that have impacted CSPF, nor is it intended to include comprehensive descriptions of each event.

Appendix III: Key Provisions of the Central States, Southeast and Southwest Areas Pension Fund’s Consent Decree

Brief History and Current Status of Consent Decree

On September 22, 1982, the Department of Labor (DOL) entered into a court-enforceable consent decree with the Central States Southeast and Southwest Areas Pension Fund (CSPF) to help ensure the plan’s assets were managed for the sole benefit of the plan’s participants and beneficiaries as required by the Employee Retirement Income Security Act of 1974 (ERISA). The consent decree has been amended several times and currently remains in effect, as amended, under the jurisdiction of the Federal Court for the Northern District of Illinois, Eastern Division. Below is a description of the key parties to and their primary responsibilities under the consent decree.

Key Parties and Their Primary Roles under Consent Decree

The consent decree defines roles and responsibilities for its parties, including the court, the court-appointed independent special counsel, DOL, the plan and its Board of Trustees, and the independent asset manager, which is called the named fiduciary.

Court

The primary role of the court is to oversee and enforce the consent decree. Specifically, the court: appointed an independent special counsel to assist it in administering has approval over the appointment of named fiduciaries and trustees; has approval over the appointment of investment managers of the may, for good cause shown, remove a named fiduciary after 60 days’ notice provided to the named fiduciary and DOL; and may, upon request by the plan, dissolve the consent decree absent good cause shown by DOL why the consent decree should continue in effect.

Independent Special Counsel

The court-appointed independent special counsel is intended to serve the court by assisting in identifying and resolving issues that arise in connection with the plan’s compliance with the consent decree and Part 4 of Title I of ERISA, and to report on the plan to the court. Specifically, the independent special counsel: has full authority to examine the plan’s activities and oversee and report on the plan’s performance of the undertakings of the consent decree; may, with court approval, employ attorneys, accountants, investigators, and others reasonably necessary and appropriate to aid him in the exercise of his responsibilities; has full access to all documents, books, records, personnel, files, and information of whatever type or description in the possession, custody, or control of the plan; may attend meetings of the plan, including meetings of the board of trustees and any meetings at which plan-related matters are discussed or considered; can petition the court to compel the plan to cooperate with the independent special counsel in the performance of his duties and responsibilities; may consult with DOL, the Internal Revenue Service, and other agencies, as appropriate, but must provide access to DOL upon its request to any documents prepared by the independent special counsel within the exercise of his power; is required to file quarterly reports, as well as any other reports the independent special counsel deems necessary or appropriate, with the court, and provide copies to DOL and the plan; may have other powers, duties, and responsibilities that the court may later determine are appropriate; and cannot be discharged or terminated during the duration of the consent decree except for leave of court, and upon the termination, discharge, death, incapacity, or resignation of an independent special counsel, the court will appoint a successor.

Department of Labor

Under the consent decree, DOL has an oversight role and may object to certain proposed plan changes. Specifically, DOL: may request and review certain reports provided by the plan and any documents prepared by the independent special counsel in the exercise of his authority; may object to the appointment of proposed trustees, named fiduciaries, investment managers of the passively-managed accounts, and asset custodians; receives notice of proposed changes to the plan’s investment policy statements from the plan; and may object to the dissolution of the consent decree.

CSPF (including Board of Trustees and Internal Audit Staff)

The plan must operate in full compliance with the consent decree, with ERISA, and with any conditions contained in determination letters it receives from the Internal Revenue Service. Specifically, CSPF, its board of trustees, and its internal audit staff must meet certain requirements. is required to use an independent asset manager known as the named fiduciary; must rebid the named fiduciary role at least once within every 6 years, with the option to extend the appointment for 1 calendar year; may remove a named fiduciary without cause shown on 6 months’ written notice to the named fiduciary and DOL; must cooperate with the independent special counsel in the performance of his duties and responsibilities and with DOL in its continuing investigation and enforcement responsibilities under ERISA; is required to recommend to the court three replacement candidates, agreeable to DOL, to replace an outgoing independent special counsel; and is required to maintain a qualified internal audit staff to monitor its affairs. is required to appoint, subject to court approval, the investment managers of the passively-managed accounts; is prohibited from authorizing any future acquisitions, investments, or dispositions of plan assets on a direct or indirect basis unless specifically allowed by the consent decree; and is required to comply with ERISA fiduciary duties, such as monitoring the performance of the assets of the plan, under Part 4 of Title I of ERISA. is required to review benefit administration, administrative expenditures, and the allocation of plan receipts to investments and administration; and is required to prepare monthly reports setting forth any findings and recommendations, in cooperation with the executive director of the plan, and make copies available to the independent special counsel and, upon request, to DOL and the court.

Named Fiduciaries

The independent asset managers, known as named fiduciaries, are appointed by the plan’s trustees, subject to court approval, and have exclusive responsibility and authority to manage and control all assets of the plan allocated to them. Specifically, the named fiduciaries: may allocate plan assets among different types of investments and have exclusive authority to appoint, replace, and remove those have responsibility and authority to monitor the performance of their are required to develop, in consultation with the Board of Trustees, and implement investment policy statements for the assets they manage, giving appropriate regards to CSPF’s actuarial requirements.

Appendix IV: GAO Contacts and Staff Acknowledgments

GAO Contact

Staff Acknowledgments

In addition to the individual named above David Lehrer (Assistant Director), Charles J. Ford, (Analyst-in-Charge), Laurel Beedon, Jessica Moscovitch, Layla Moughari, Joseph Silvestri, Anjali Tekchandani, Margaret J. Weber, Adam Wendel, and Miranda J. Wickham made key contributions to this report. Also contributing to this report were Susan Aschoff, Deborah K. Bland, Helen Desaulniers, Laura Hoffrey, Jennifer Gregory, Sheila McCoy, Mimi Nguyen, Jessica Orr, Monica P. Savoy, and Seyda Wentworth.

Related GAO Products

Central States Pension Fund: Department of Labor Activities under the Consent Decree and Federal Law. GAO-18-105. Washington, D.C.: June 4, 2018.

High-Risk Series: Progress on Many High-Risk Areas, While Substantial Efforts Needed on Others. GAO-17-317. Washington, D.C.: February 15, 2017.

Pension Plan Valuation: Views on Using Multiple Measures to Offer a More Complete Financial Picture. GAO-14-264. Washington, D.C.: September 30, 2014.

Private Pensions: Clarity of Required Reports and Disclosures Could Be Improved. GAO-14-92. Washington, D.C.: November 21, 2013.

Private Pensions: Timely Action Needed to Address Impending Multiemployer Plan Insolvencies. GAO-13-240. Washington, D.C.: March 28, 2013.

Private Pensions: Multiemployer Plans and PBGC Face Urgent Challenges. GAO-13-428T. Washington, D.C.: March 5, 2013.

Pension Benefit Guaranty Corporation: Redesigned Premium Structure Could Better Align Rates with Risk from Plan Sponsors. GAO-13-58. Washington, D.C.: November 7, 2012.

Private Pensions: Changes Needed to Better Protect Multiemployer Pension Benefits. GAO-11-79. Washington, D.C.: October 18, 2010.

Private Pensions: Long-standing Challenges Remain for Multiemployer Pension Plans. GAO-10-708T. Washington, D.C.: May 27, 2010.

The Department of Labor’s Oversight of the Management of the Teamsters’ Central States Pension and Health and Welfare Funds. GAO/HRD-85-73. Washington, D.C.: July 18, 1985.

Investigation to Reform Teamsters’ Central States Pension Fund Found Inadequate. HRD-82-13. Washington, D.C.: April 28, 1982.