Was Multiemployer Plan Withdrawal Liability Reason for Hostess Bankruptcy?
November 26, 2012
Recent headlines about the demise of Hostess Brands surprised many of us. Founded in 1930, Hostess was one of the largest wholesale bakers and distributors of bread and snack cakes under such iconic brands as Ding Dongs®, Dolly Madison®, Drake’s®, Hostess®, Twinkies® and Wonder®. The bankruptcy-induced closing eliminated 18,500 American jobs in 33 bakeries, 565 distribution centers, approximately 5,500 delivery routes and 570 bakery outlet stores.
Although there are many reasons for this failure, my pension experience and knowledge of ERISA leads me to conclude that “multiemployer plan withdrawal liability” was a critical reason for this shocking development. In the bankruptcy filing for Hostess, CEO Brian J. Driscoll cited “restrictive” labor rules and legacy pension burdens as the main reason for the filing. The company had 372 collective bargaining agreements with a dozen unions, and Hostess was contributing $103 million a year to employees’ pension funds.
Because it was so heavily unionized, Hostess participated in 40 “multiemployer pension plans,” which is a type of union-sponsored defined benefit plan with more than one employer contributing pursuant to collective bargaining agreements. Hostess noted in the bankruptcy filing that its contributions to these plans significantly exceeded the amount necessary to fund the retirement benefits of the Hostess workforce and covered the unfunded benefits of other employers that ceased to exist or otherwise previously withdrew from participation.
Under the Multiemployer Pension Plan Amendments Act of 1980, ERISA was amended to shift the financial burden of unfunded multiemployer plans upon companies with union employees. Such employers were, for the first time, required to pay a ratable share of the vested, unfunded liability of all covered employees even where such employer honored all of its collectively bargained funding obligations. Over the last several decades, the number of contributing employers has significantly dwindled, thus increasing the burden on the companies, such as Hostess, that remained. It has been reported that the Hostess withdrawal liability would have been as much as $2.0 billion.
Upon meeting a new client that contributes to a multiemployer plan, I always ask: “What is your withdrawal liability?” If management does not know the answer, I make sure that they find out. More importantly, the question shifts to, “What are you going to do to manage this liability before it is too late?”
This problem does not get better with age. In fairness to the unions, the problem has grown as the number of contributing employers continues to shrink. Further, many such plans assume pre-retirement interest rates of 7 to 8% while most are doing well to earn 2%. Unreasonable actuarial assumptions and out-sized administrative costs further erode dwindling resources available to fund benefits.
In the absence of a bankruptcy petition, withdrawal is not permitted while a current contract is in force. Withdrawal must be a planned event as part of a negotiation strategy. Although not an easy subject at the bargaining table, ignoring the issue by simply “kicking the can down the road” can be a fatal error. Now is the time to act!