Central States Pension Fund: Investment Policy Decisions and Challenges Facing the Plan

Multiemployer plans are collectively bargained pension agreements often between labor unions and two or more employers. CSPF is one of the nation's largest multiemployer defined benefit pension plans, covering about 385,000 participants. Since 1982, the plan has operated under a court-enforceable consent decree which, among other things, requires that the plan's assets be managed by independent parties. Within 7 years, CSPF estimates that the plan's financial condition will require severe benefit cuts. GAO was asked to review the events and factors that led to the plan's critical financial status and how its investment outcomes compare to similar plans.

GAO describes (1) what is known about the factors that contributed to CSPF's 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 CSPF's investments have performed over time, particularly compared to similar pension plans.

GAO reviewed relevant federal laws and regulations; interviewed CSPF representatives, International Brotherhood of Teamsters officials and members, federal officials, and knowledgeable industry stakeholders; reviewed CSPF documentation including investment policy statements and board of trustee meeting minutes; and analyzed investment returns and fees from required, annual pension plan filings and from consultant benchmarking reports.

The Central States, Southeast and Southwest Areas Pension Fund (CSPF) was established in 1955 to provide pension benefits to trucking industry workers, and is one of the largest multiemployer plans. According to its regulatory filings, CSPF had less than half the estimated funds needed to cover plan liabilities in 1982 at the time it entered into a court-enforceable consent decree that provides for oversight of certain plan activities. Since then, CSPF has made some progress toward achieving its targeted level of funding; however, CSPF has never been more than 75 percent funded and its funding level has weakened since 2002, as shown in the figure below.

Stakeholders GAO interviewed identified numerous factors that contributed to CSPF's financial condition. For example, stakeholders stated that changes within the trucking industry as well as a decline in union membership contributed to CSPF's inability to maintain a healthy contribution base. CSPF's active participants made up about 69 percent of all participants in 1982, but accounted for only 16 percent in 2016. The most dramatic change in active participants occurred in 2007 when the United Parcel Service, Inc. (UPS) withdrew from the plan. At that time, UPS accounted for about 30 percent of the plan's active participants (i.e. workers). In addition, the market declines of 2001 to 2002 and 2008 had a significant negative impact on the plan's long-term investment performance. Stakeholders noted that while each individual factor contributed to CSPF's critical financial condition, the interrelated nature of the factors also had a cumulative effect on the plan's financial condition.

Both CSPF's investment policy and the process for setting and executing it have changed several times since the consent decree was established in 1982. The original consent decree gave an independent asset manager—called a named fiduciary—exclusive authority to set and change the plan's investment policies and manage plan assets, and prohibited CSPF trustees from managing assets or making investment decisions. Initially, the named fiduciaries sold the troubled real estate assets acquired during the pre-consent decree era. Subsequent changes include the following:

In 1993, the named fiduciaries started to increase investment in equities, and their policies continued to direct that asset allocations be weighted toward equities until early 2017.

Between 2003 and 2010, the court approved three plan decisions to move a total of 50 percent of CSPF's assets into passively-managed accounts (passive management typically seeks to match the performance of a specific market index and reduce investment fees).

An early-2017 investment policy change precipitated by CSPF's deteriorating financial condition will continue to move plan assets into fixed income investments ahead of projected insolvency, or the date when CSPF is expected to have insufficient assets to pay promised benefits when due. As a result, assets will be gradually transitioned from “return-seeking assets”—such as equities and emerging markets debt—to high-quality investment grade debt and U.S. Treasury securities with intermediate and short-term maturities. The plan is projected to become insolvent on January 1, 2025. CSPF officials and named fiduciary representatives said these changes are intended to reduce the plan's exposure to market risk and volatility, and provide participants greater certainty prior to projected insolvency.

GAO found that CSPF's investment returns and expenses were generally in line with similarly sized institutional investors and with demographically similar multiemployer pension plans. For example, GAO's analysis of returns using the peer group measure used by CSPF known as the Wilshire Associates' Trust Universe Comparison Service (TUCS), showed that CSPF's annual investment returns since 1995 were above the median about as many times as they were below. Similarly, comparing CSPF's returns to a peer group of similar multiemployer defined benefit plans using federally required annual reports found that CSPF's annual investment returns were in line with those of its peers. Specifically, CSPF's annual returns were above the median nine times and below it six times—and CSPF's overall (dollar-weighted) average annual return from 2000 through 2014 was close to that of the peer median average return of 4.8 percent.

In addition, GAO found that CSPF's investment fees and other administrative expenses have also been in line with other large multiemployer plans. For example:

CSPF's investment fees as a percentage of assets were about 9 percent lower than the median of large defined benefit multiemployer plans over the 2000 through 2014 period—though much of that difference is accounted for by a relative reduction in investment fees since 2007. CSPF's investment fees as a percentage of assets were, on average, about 34 basis points (or 0.34 percent).

CSPF's administrative expenses related to the day-to-day operations of the plan have also been in line with other large multiemployer plans. CSPF's administrative expenses per participant were below the median for large defined benefit multiemployer plans for 12 of the 15 years over the 2000 through 2014 period. As of 2014, CSPF's administrative expense was $98 per participant, which is about 16 percent less than the median for large defined benefit multiemployer plans.

GAO is not making recommendations in this report.

Established in 1955 to provide pension benefits to trucking industry  workers, the Central States, Southeast and Southwest Areas Pension  Fund (CSPF) is one of the nation’s largest multiemployer pension plans,  with $15.3 billion in assets at the end of 2016. About 1,400 employers are  obligated to contribute to CSPF, and the plan covers almost 385,000  participants. Since 1982, the plan has operated under a court- enforceable consent decree which, among other things, requires it to  obtain approval from the U.S. District Court for the Northern District of  Illinois, Eastern Division, for certain plan activities and requires  independent asset managers to manage the plan’s investments.  Currently, CSPF is projected to become insolvent within 7 years and is  classified as a “critical and declining” plan under the Employee  Retirement Income Security Act of 1974 (ERISA), as amended by  subsequent laws, including the Multiemployer Pension Reform Act of  2014 (MPRA). In addition to causing financial hardship for hundreds of  thousands of CSPF retirees who are at risk of severe benefit cuts,  CSPF’s projected insolvency is also likely to coincide with the projected  insolvency of the multiemployer insurance program managed by the  Pension Benefit Guaranty Corporation (PBGC). The insolvency of  PBGC’s multiemployer program would significantly impact the level of  PBGC-guaranteed benefits to current and future beneficiaries in all  multiemployer plans receiving PBGC assistance. CSPF’s critical and declining status has sparked interest in understanding the broad factors  that have caused the plan’s decline and what role, if any, the plan’s  investment policies have played in contributing to this condition. In light of  these issues, you asked us to review the events and factors that led to  CSPF’s critical financial condition and how it compares to similar plans.

In this report, we reviewed (1) what is known about the factors that  contributed to CSPF’s 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 CSPF’s  investments have performed over time, particularly compared to similar  pension plans.

We used several methodologies in developing our findings. For all  objectives, we reviewed CSPF and U.S. Department of Labor (DOL)  documentation and available literature; reviewed relevant federal laws  and regulations; and interviewed CSPF officials, federal officials, and  other knowledgeable industry stakeholders. To describe the major  factors that led to CSPF’s critical financial condition, we conducted 23  semi-structured interviews with federal agency officials and other  stakeholders 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.  In our semi-structured interviews we asked about key factors affecting the  plan and the broader regulatory and financial environment in which  multiemployer plans operate. We selected knowledgeable stakeholders  based on a review of literature and prior GAO work, and  recommendations from other stakeholders. Additionally, we selected  stakeholders whose expertise coincided with the scope of our objectives  and who would be able to provide a broad range of perspectives. 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 for setting and  executing it since the consent decree was established, we reviewed  CSPF’s investment policy statements, performance reports from the  plan’s named fiduciaries, select board of trustee meeting minutes, and  select correspondence between CSPF and DOL. We also interviewed  CSPF and federal officials about a recent investment policy change. To  analyze CSPF’s performance, we examined its investment returns in  comparison to a customized Wilshire Associates’ (Wilshire) Trust  Universe Comparison Service benchmark of trusts with $3 billion or more  in assets. CSPF provided these data, and they also included these data  in the independent special counsel reports. Wilshire provided  supplemental data using the same benchmark specifications. We also  analyzed investment returns and fee and expense data from the Form  5500, the government’s primary source of information about pension  plans. We used this Form 5500 data to examine CSPF’s investment  returns and fees and expenses in comparison to groups of similar  multiemployer pension plans. The Internal Revenue Service (IRS), DOL,  and PBGC jointly developed the Form 5500-series returns for employee  benefit plans to satisfy annual reporting requirements under ERISA and  the Internal Revenue Code. We primarily relied on PBGC’s Form 5500  research database as the agency takes several steps to correct and  update the raw electronic data. We also took steps to assess the  reliability of the PBGC data and checked data fields and made  appropriate corrections. In addition, 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. After these processes, we determined the data to  be sufficiently reliable for our purposes. For more information on our  objectives, scope, and methodology, see appendix I.

We conducted this performance audit from July 2016 to June 2018 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe the  evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.

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

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.

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.)

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.)

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.

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.

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

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).

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.

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.

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.

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.

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.

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.

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 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.

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.

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].

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.

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.

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.

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.

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.

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

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.

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.