Disclaimer: this post, along with everything else on this website, is the personal opinion of a random dude typing on a computer. It is not endorsed, approved, vetted, sponsored, or tied by or to any other person or organization. I humbly ask you to treat it as such.
This post started as an examination of the Market Based Cash Balance Plan (MBCBP) offered in the FedEx pilots’ TA. I’d written similar material about the Delta pilots’ new MBCBP. Aware of my past work, several Purple pilots asked my opinion on their MBCBP offering. I figured I’d write a single post to cover some basics, rather than continuously duplicating my responses, and hopefully help other curious pilots as well.
As friends started explaining more about their TA, and as I dug into the TA documents, I formed a very strong opinion about the Tentative Agreement itself. Feeling that the overall TA represented important context for understanding and evaluating the MBCBP, I ended up writing a post laden with my personal opinions.
I got a lot of responses. The overwhelming majority of those responses were positive. They agreed with my evaluation. I knew they would because I’d gathered input from several very smart Purple pilots before I wrote a single word.
However, some other readers felt slighted by my opinions.
I apologize to those with hurt feelings. I intentionally use a snarky writing style to keep attention and spur active consideration, rather than passive consumption. I like to think of myself as supportive of all people no matter their identity, background, or beliefs. I regret if I failed to live up to that ideal for you.
So, I’ve deleted my original post and associated comments. What follows focuses on a discussion of the proposed FDX MBCBP. I make references to and comparisons with the DAL MBCBP when valuable. However, please understand that these two plans are very different because they were created for different goals. That’s okay.
I just want Purple pilots to understand how their offering stacks up against the rest of the industry. I also think they have some questions to take back to their MEC. If they happen to get a chance to renegotiate any MBCBP provisions, I want them to know what may be possible because it’s already been approved by the Treasury for another group of airline pilots.
In my first attempt at this completely revised version of this post, I made a statement about Scope, the most important part of any pilot contract. I’ve been asked to remove that section, so you may notice it missing here.
MBCBP
Let’s move on to the MBCBP. In general, this is a good deal for many pilots.
MBCBPs are not uncommon in corporate America. The IRS caps total contributions to a 401k account at $66,000 per year (in 2023). Many high income earners want an additional tax-advantaged saving and investing vehicle. A MBCBP is exactly that: a way to defer taxes on more than the IRS limit of $66,000 per year.
MBCBPs fall under the same rules as Defined Benefit (DB) plans. One of those rules says that if a company offers this type of plan, every employee in a given employee group must participate. That’s not ALPA or our company trying to force anything upon us. That’s the US Department of the Treasury.
This rule means that every future pilot at an airline with a MBCBP will be required to participate. However, for pilots who worked at an airline before a MBCBP was enacted, the Department of Labor’s Railway Labor Act (RLA) also applies. The RLA requires pilots (and to a lesser extent their employers) to maintain status quo when negotiating new contracts. (Listen to Episode 12 of the Engage podcast for more detail on this part of the RLA). The status quo mandate in the RLA provides a loophole whereby the Treasuring is allowing pilots an irrevocable, one-time choice on whether to participate in a new MBCBP or not.
It’s good we’re getting this option. I believe that every airline pilot facing it should consult a Certified Financial Advisor before making their choice.
For FDX pilots, the MBCBP is also an opportunity for the company to reduce their burden for funding their legacy pilot pension plan. For pilots who choose to participate in the MBCBP, it will replace their pension altogether. For these pilots that’s a fantastic opportunity!
The FDX TA specifies that pilots switching over to the MBCBP will immediately receive “contribution credits” equivalent to what they would have had if they’d been participating in this plan for their entire career. For senior FDX pilots, this could easily result in a seven-figure balance in the MBCBP the day it’s enacted.
Both the Purple and Widget MBCBPs include a provision allowing pilots to start withdrawing money from the plan at age 59 ½, and then annually each year thereafter until retiring. Again, for senior FDX pilots, this is an enormous benefit. Many should be able to switch to the MBCBP, immediately get a very large balance in the plan, and then immediately transfer those funds into an IRA.
They will have full control over how the funds in that IRA are invested. That’s a personal account in their name that nobody else can touch. The fact that participating FDX pilots get contribution credits based on their entire career is a triumph, and a much better deal than Delta pilots get because they lost their pension more than a decade ago.
Administration, Fiduciary Duty
One of the restrictions that the Treasury puts on MBCBPs is that it does not allow individual participants any control over the fund’s investments. The entire fund must be managed by a third party. The participants can specify investment goals, but cannot have direct control over how the third party administrator pursues those goals.
The Delta pilots’ MBCBP will be administered by PriceWaterhouseCoopers. The proposed FedEx pilots MBCBP would be administered by FedEx itself.
In theory, each plan’s administrator bears a fiduciary duty to the plan’s participants. The concept of “fiduciary duty” is very important in finance, and represents a binding, enforceable obligation for a service provider to act in the best interest of their client.
It is advantageous that neither Delta Air Lines, the Delta ALPA MEC, or the Delta pilots themselves can directly control the MBCBP, and that their third party administrator bears a fiduciary duty to the Delta pilots.
The fact that FedEx itself would administer its pilots’ MBCBP could potentially represent a conflict of interest.
This fact bears detailed consideration by all FedEx pilots, especially those considering participation in the new MBCBP. If I were part of that group, I’d ask my union reps if there was a way to assign a different administrator who may be less vulnerable to a conflict of interest.
Expected Returns
A MBCBP is valuable because it defers taxes, giving your money time to grow before the government takes its cut. However, since these plans are required to preserve capital and serve a diverse group of investors, they usually target investments with low volatility. This frequently also means investments with low returns.
Traditionally, MBCBPs might invest in bonds or Treasury Bills for which a 3% return would be very high. That type of return is so low compared to the performance of a low-fee whole-market index fund, that in some cases it would be more advantageous for individuals to take the tax hit up front and invest on their own.
The Delta pilots’ MBCBP got approved to invest in somewhat riskier securities that offer somewhat higher returns. The fund that PWC has chosen to invest in for now enjoyed annual returns upwards of 8.5% before the current bear market.
I have been unable to determine based on available documents what investing strategy the FedEX pilots’ MBCBP would use. It will be very important to find this out before choosing whether to participate or not. Only after a pilot knows the fund’s target/expected return can they have a meaningful discussion with a Certified Financial Advisor on whether it makes sense to participate.
Trust
One major advantage of the MBCBP is that the money is protected from an airline’s creditors in case of bankruptcy. The funds are all commingled and each pilot’s “account” is sort of theoretical until the money is withdrawn. However, it is very well protected.
Even better, Treasury rules require each pilot’s payout to never be less than the amount of capital invested on his or her behalf. If a market downturn has a pilot’s theoretical account balance below what was invested, the airline is required to make up the difference out of pocket. That’s a good provision.
Many FDX pilots will choose to not participate in the MBCBP, instead sticking with their traditional pension.
While that may be the best option for many senior pilots, it’s worthwhile for more junior pilots to consider how confident they feel in the long-term solvency of their pension benefits. FDX is one of the few airlines, let alone American companies, that still offers a traditional pension. If you ask a pilot at almost any other airline, they’ll tell you a frustrating story about how the promise of a very lucrative pension vanished, practically overnight, due to circumstances far beyond their control.
A MBCBP may offer protections for a pilot’s earnings that a pension cannot. How much to trust either of these vehicles will be a very personal decision.
MBCBP Purpose, Funding, and Caps
Although the general purpose of a MBCBP is to provide tax-advantaged savings above the annual IRS 401k limit, the FDX plan is intended as a direct replacement for the legacy pension.
The DAL MBCBP is also generally intended to replace a lost pension, but it’s not structured as a 1:1 replacement nearly as much as the FDX plan is. I’ve encountered a great deal of confusion over this, so please take an extra moment or two to notice the specifics in this section before sending me feedback.
FDX pilots’ 401k is funded through a combination of a 9% company Direct Contribution (DC), extra hours in a sick bank, and personal contributions. This combination of sources can put up to $66,000 per year into a FDX pilot’s 401k account. Note that the IRS limits the company’s 9% DC to the first $330,000 of a pilot’s annual earnings. (That limit tends to increase each year).
The proposed MBCBP would be funded by a separate 11% company contribution. Based on information in some of your MEC’s materials, and at least one frustrated comment to my original post, it appears that this 11% contribution will happen in parallel to funding of a pilot’s 401k account. The 11% MBCBP contribution will also be limited to the first $330,000 of a pilot’s income meaning the absolute maximum that could possibly be contributed to a pilot’s MBCBP would be $36,300 per year. As far as I can tell, there is no other provision for putting more money than this into a pilot’s MBCBP in a given year.
This means the absolute maximum that a FDX pilot could protect in tax-advantaged retirement accounts would be $102,300 per year.
The DAL pilots’ setup is quite different.
Delta pilots get a 16% company DC into their retirement accounts. Under their new contract, this DC increases to 18% in a few years. For these pilots, absolutely nothing is contributed to the MBCBP until after their 401k account reaches the annual IRS limit of $66,000.
In general, it’s always desirable to maximize contributions to a 401k first because it offers the pilot better control over their investments, and more flexibility on how to use/withdraw the money.
Delta’s DC is subject to the same limit of $330,000 in income, meaning the most the company could contribute to a Delta pilot’s 401k in a year is $52,800. At either company, a pilot wishing to reach the $66,000 per year limit in their 401k must make up the difference with their own funds.
For Delta pilots not participating in the MBCBP, once the company’s DC reaches $52,800, or the pilot’s total annual 401k contributions reaches $66,000, the company’s 16% DC goes to the pilot as taxable cash each month. For pilots who choose to participate in the MBCBP, the entirety of that excess 16-18% DC will go into the MBCBP.
Note that there is no limit on how much money can be contributed to a Delta pilot’s MBCBP in a given year. I’ve run the numbers and found that it will be possible for the most senior Delta pilots to get more than $66,000 into their MBCBP each year, if they so desire.
This means the absolute maximum that a Delta pilot could protect in tax-advantaged retirement accounts will far exceed the annual $102,300 figure available to FedEx pilots. For pilots choosing to participate in their MBCBP, the Delta version offers a significant advantage here.
This setup also gives Delta MBCBP participants significant control over how much money is contributed on their behalf each year. It will be possible for a Delta pilot to make the one-time decision to participate in the MBCBP, but ensure that very little money actually makes it into the plan in a given year. Then, when that pilot wishes, they will be able to switch strategies and maximize MBCBP funding each year at the point where it becomes most advantageous.
If I were a FDX pilot, I would address this difference with my union reps. I’d hope that my union might be able to negotiate a way to get more money into the MBCBP for those pilots wishing to participate. I’d also prefer the option of having more control over how much money goes into my MBCBP in any given year.
Exit Options
As mentioned, both versions of MBCBP allow a pilot to start getting their money out of the plan at age 59 ½.
Delta pilots will have three major options for withdrawing their money from their MBCBP:
- One of a few types of annuity
- Taking a lump sum as (taxable) cash
- Rolling over their balance into a tax-advantaged account, probably an IRA. (This is a non-taxable event).
I suspect that FedEx pilots will have the same options for getting their money out of their MBCBP. However, the documents available only specifically mention options #1 and #2 above. This would be undesirable.
Annuities are frequently laden with unnecessary fees and provide lower payouts than a reasonably educated investor can achieve by managing their investments themselves or with cheaper help from a CFA. Subjecting a lump sum to a single, immediate tax hit negates the entire purpose of a MBCBP in the first place.
The FedEx pilots must clarify with their union reps whether they will also have the option to do a direct roll-over into an IRA as a non-taxable event. I suspect the failure to mention this specific option is an oversight. If not, it would be worth advocating for this provision to be added to the plan before electing to participate.
Conclusion
These two versions of MBCBP are very different. That doesn’t necessarily make one better or worse than the other. What matters is that each pilot considers how their plan’s provisions might affect them. This should absolutely be done with the help of a Certified Financial Advisor.
The FDX pilots’ MBCBP has some very attractive qualities. However, there are also some outstanding questions that need to be resolved before each pilot makes their decision.
I hope this helps you frame your questions for your reps, and your discussion with your finance pro.
I don’t plan to adapt my MBCBP Calculator spreadsheet for your plan. It would require a lot of redesign and reprogramming. However, you’re welcome to download your own copy and edit it as you see fit.
I don’t intend to allow comments on this post, based on the negativity I got in some comments on the last version. If you have a question that I might be able to help with before you go to a CFA, please reach out to me. If my writing has not been valuable to you, I hope other resources will be.
The feature image for this post represents a potentially wet leased aircraft.