Nashville, We Have A Problem

I recently read about a very sad state of affairs that hits very close to home – close to Music City USA and close to many of my very good friends. It seems the pension plan of the AFM (the American Federation of Musicians, or the Musicians Union) is in severe trouble.

During the 90’s and the early 2000’s the AFM pension plan was a much vaunted benefit of the Musicians Union. As musicians played on union sessions that were “on the card”, those paying for the sessions (the recording labels, publishing companies, tv shows, etc) were contractually obligated to pay a certain percentage of the total compensation paid to the session musicians into their AFM pension fund. For many (most?) musicians these pension payments and the AFM pension management remain a very important aspect of their total financial picture as they plan for retirement.

Today’s “state of the union” presents a far different picture of the AFM’s financial health than during the 1990s when the music industry was a bit more sound. In its most recent reporting year, ending March 2016, things at the AFM pension plan have turned downright ugly.

In the last year, the fund lost $10 million by way of investment losses, paid $11 million in investment fees, paid $14 million in administrative fees, and saw only $63 million in income/contributions while paying out $150 million in benefits (4). Taking in $63M while outputting $185M risks premature death…

a 100 dollar bill on fire

This leads to problem #1 with pensions – performance. Your hard earned money gets put into a savings pool where you are at the mercy of the trustee & administration to properly manage and grow your retirement nest egg. You will have no control over allocation or performance. Furthermore, pension plans must invest very conservatively in order to maintain the necessary cash on hand to fulfill their withdrawal/benefit obligations of those who are drawing their pensions, especially when withdrawals exceed contributions.

Unlike an individual investor who can let his investments ride for 20 years or more without a need for withdrawals, pensions cannot handle wild swings in the market that one would experience with an aggressive (higher risk / higher reward) long-term investing allocation.

fund graph 2The source of this chart is linked below (7). This shows the fund’s performance (red line) as measured against high risk, moderate risk, and conservative risk index fund averages.

Where Problems Began:

The trouble for the AFM fund began during the 2008 banking crisis. From 2007-2009 the fund took a crushing blow, losing 40% of its assets (4). By 2010 the fund had to enact “rehabilitation measures” to stabilize its footing. These measures increased contributions while eliminating certain benefits. One of these measures was to slash the plan’s multiplier.

Pension plans use what’s called a “multiplier” to determine your benefit, and at the AFM Pension, that multiplier has historically run around $4.65 until the trouble began. To calculate your annual benefit you do this: [total pension contribution] x [multiplier/100] x [12] = [annual benefit].

So…. Someone doing well as a musician and contributing $132,000 into their pension over the course of a 30 year career (we’re going to come back to that $132,000 figure, so I’m using it for a reason) would multiply that $132,000 times .0465 and then times 12, and would expect to retire with an income of around $74,000 per year in retirement, or a little over $6,000/month. Not too shabby, right? Sadly, it turns out that multiplier was unsustainable.

The AFM Pension has been forced to slash this multiplier from $4.65 to $1.00 over the past decade. (2,3) That means the $74,000 per year you were looking forward to a few years ago now looks like $16,000 per year in retirement income going forward ($1,300/month). Furthermore, the trustees of the pension plan now say they expect that multiplier to stay at $1.00 for the foreseeable future, and they are notifying plan members that they will need to rely more on personal savings and social security to fund their retirement.

Current Footing:

Currently the AFM plan holds assets of 76 cents for every one dollar promised in future benefits.  As assets have decreased by 12% over the last 3 years, liabilities have increased by 6% in the same time frame. The current market value of assets in the fund equal $1,703,971,000 (2) and if you use last year’s numbers as a measure of the way things are going you would look at a differential equation to calculate how long the fund can last under these conditions.

That equation would be: dx/dt = 63,000,000 [income] – 185,000,000 [expenses] + 0.032x(t) [3.2% annual rate of return], with initial condition x(0) = 1,703,971,000 [current assets]. The final result shows the plan would hit $0 in just 18.5 years if things continue like 2016. Not a solid footing unless something changes quickly.

I would not continue to contribute to this plan. One local AFM website is pleading with its members; “No matter how old you are, now is the time to begin building your pension, to ensure that you have a regular income in your later years.”  It goes on to advertise; “Wouldn’t you like to be secure in knowing you can begin to collect a pension check every month when you reach the age of 65? The AFM-EPF is the only employer-paid pension plan available to traveling acoustic musicians and it is much better than anything you can get on your own.” I think this premise could be argued against very effectively looking at the current state of affairs and the results of the past results of management.

Fees Versus Performance – The Winner Is???

The AFM Pension currently employs 25 professional investment managers + 5 management trustees + 5 union trustees. The Fund Administrator is paid over $400,000 per year and has received a pay increase every year for the past decade, during which time the fund has spent almost $250 million dollars in administrative fees while generating a net average return of 3.2% per year annualized over that 10 years (1,7). The S&P500 average return was 11% per year in that same timeframe.

Not impressed?

This leads to Problem #2 with pensions – fees.  Since 2009, fees at pension plans have quadrupled according the Wall Street Journal. Many pension funds, desperate for performance, have turned to hedge funds and alternative investments that bring with them increased costs. Fees at pension funds routinely run over 2% or more per year. Most hedge funds & alternative investments work on a 2/20 fee structure where in addition to a 2% fee on assets under management, they will also take 20% cut of the profits. The fees paid by the AFM in 2015 (the last public filing I could find on record)  can be seen here. Get ready for some head-scratching…

A Critical & Declining Status:

As of early 2017, fears have begun surfacing that the AFM Pension Fund could be declared in “critical and declining” status as defined by 2014 legislation passed by Congress. If the AFM Pension were to consider filing this “critical status”, it would allow the fund to begin reducing benefits already earned in order to secure the solvency of the plan going forward. In “critical status”, the plan would go into the receivership of the Federal Government and be managed by the Pension Benefit Guarantee Corporation, or PBGC.

Under such action, benefits would reduced and capped at 100% of the first $11 of monthly benefits, plus 75% of the next $33 of monthly benefits, times the number of years of service (a maximum of $38.75 times years of service). Notice that benefits would be based on years of service and not total contributions. If you were a participant for 30 years, your maximum benefit would be $1,072.50 a month, or $12,870 a year – no matter what your total contribution might have been. In order to attain that maximum benefit you’d need to be receiving $44 times years of service now, or at least $15,840 in annual benefits (5), meaning you would see a reduction of around 20% under PBGC protection. Ouch. You can read more here.

A full report is due during the summer of ’17 to determine the 20-year solvency of the fund. If the report indicates the fund will not stay solvent for that long, members will be given a chance to vote on whether they want to apply for the “critical & declining” status and seek US Government protections under the PBGC. (7).

Circling Back Around:

If you are receiving $15,840 in annual benefits now, that means you’d have to have total contributions of around $132,000 over the last 30 years – which is why I used that number earlier – so let’s continue working with that $132,000 number for some other comparisons.

Doing the math with today’s $1 multiplier means receiving a pension of $1,320/month ($15,840/yr) on your $132,000 worth of contributions – the equivalent of a 5% withdrawal rate on a $317,000 nest egg. In previous blogs I have written that most experts recommend no more than a 4-5% rate of withdrawal annually to ensure you do not outlive your nest egg and survive a variety of market conditions. A nest of egg of around $317,000 does not sound too shabby, right? But how does that compare to saving $132,000 on your own –  outside of the pension plan?

With a total pension contribution of $132,000 across 30 years you would have contributed $4,400/year or $367/month. Are you following me so far? Here we go…

If you invested $367/month in an S&P500 Index Fund over the past 30 years, beginning in 1987 and ending today, you would have seen an average annual return of around 11% on that index, meaning those investments would be worth around $900,000 today. At a 5% withdrawal rate on that nest egg in retirement you’d have $45,000/year to live on, or $3,750/month – that’s almost 3 times the amount you would see from the monthly pension withdrawal from the AFM under this plan with the exact same amount of contribution.

Performance wise, by paying you $1,320/month on $132,000 of contributions the AFM pension is essentially turning your $132,000 in contributions into the equivalent of $317,000 (at 5% annual withdrawals) for “nest egg withdrawal” purposes under this plan. Turning $132k of contributions into that equivalent $317k nest egg over 30 years means pension would realize an equivalent rate of 2.96%/year across those 30 years. I believe that rate of return is very easy to beat. An simple S&P Index Fund would offer a far greater return.

Real Life:

That’s the math as I see it. My intent is not to disparage the AFM, the Pension Fund, or it members/participants, but to provide a real-life look at its current standing in order to say “now what?”

My hope is the AFM will be willing to slash costs and simplify their investments into more cost-effective and better performing strategies that will ensure the solvency of the fund in the immediate future and ensure those who have contributed their hard earned dollars will see a benefit from that work.

I would also hope that those union members in the fund can re-direct their investing dollars elsewhere to find better returns at lower cost with greater security. If I was anywhere near retirement age that would be of top priority for me in the face of these problems.


I wrote this blog post back in March and debated on whether or not I should post it. Then I read a wonderful article in the Nashville Scene written by Jon Gugala – the first such article I’ve seen written by Nashville press. I’m glad the issue is finally getting local coverage and I look forward to his continued reports.

On July 20, 2017 he writes, “In Nashville, local union leadership set a closed-door meeting for its members on Monday at its hall on Music Row. A maximum of 80 members would be allowed inside, and only one pre-submitted question from each would be accepted, with no guarantee of it being answered.” WHAT? Mr. Gugala further details a lawsuit against the union pension fund’s board of trustees here.

I have consulted many sources in an effort to verify these numbers and calculations in an attempt to ensure their accuracy. Any miscalculation is not an attempt to present the issue in a false light, but would be just that – a miscalculation based on mathematical error or erroneous data. I have noted the following sources for what I believe to be quality information, please do your own due diligence, esp. if you are in the pension as your benefits will be very specific to your personal AFM status.



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