The National Retirement Planning Coalition has designated April 11-15 as the 2016 National Retirement Planning week. In celebration, each day this week Watkins Ross will share some fast facts and planning tips on the various types of retirement plans we service. Thursday’s focus:
- In 2015, the average cost to provide a traditional defined benefit plan for an employee was $3.98 per working hour.
- New ASC and GASB disclosure rules regarding a defined benefit plan’s funded status significantly impacts the financial statements of plan sponsors who maintain underfunded plans.
- In 2013, the total number of traditional defined benefit plans covered by PBGC was just over 22,600, which is slightly less than 50% of the number of plans covered in 1997 and approximately only 20% of the number covered in 1985.
- More than half of all defined benefit plan sponsors have a frozen (or partially frozen) plan and approximately one-third anticipate freezing their plan in the next two years.
- In 2009, the Social Security Administration issued a report on the effect of freezing defined benefit plans and subsequently instating enhanced defined contribution plan accruals. The study showed that this combination would typically result in lower anticipated retirement plan incomes for baby boomers (most significantly late wave boomers); however, post-baby boomers may have higher benefits under this approach.
1. SHIFT THE PARADIGM
Once a defined benefit plan is frozen, the plan sponsor should no longer consider it an employee benefit plan but rather a debt to be planned for, managed, and repaid.
2. DON’T RUN…”DE-RISK”
As defined benefit plan sponsors understand the impact risk factors like market volatility, longevity, and changing interest rates may have on the funded status of their plans, they can take steps to reduce the adverse impact these factors have on their plan, while also improving the plan’s funded status and reducing administration and funding costs to the plan sponsor. This process is known as de-risking. While not all de-risking strategies are appropriate for all defined benefit plans, most plans will benefit by implementing one or more such strategies.
3. FIGURE OUT A PATH TO GLIDE ON
A Glide Path for a defined benefit plan is an investing road map to progressively reduce the investment risk and maintain the plan’s funded status as that status improves. When combined with liability driven investing (LDI), a Glide Path can smooth out the volatility and increase the predictability of a plan’s funding.
4. CONSIDER THE PAYOFF OF PAYOUTS
By offering a onetime lump sum payout option to participants with vested deferred benefits in a defined benefit plan, sponsors reduce PBGC and administrative costs while also limiting financial and demographic risks to their plan’s funded status.
Implementing a comprehensive de-risking strategy and getting a defined benefit plan on the road to financial health requires coordination and communication between the plan sponsor, the financial managers of the assets, and the plan’s actuaries so that all parties understand how to frame potential outcomes and evaluate alternatives in a risk management context, all while considering the correlations with the risks that affect the sponsor’s core business.