Placing money into a secure vault has long been equated with safety. Cautious individuals have used this approach for centuries, accepting zero gross returns in exchange for protection against loss of principal. And although the thesaurus suggests “vault” and “safe” are synonyms, the strategy can be anything but, sometimes blowing up with apocalyptic destructive power.
This complacent strategy is particularly risky for sponsors of defined benefit plans, especially frozen ones on the path to termination. For them, stashing assets in the vault for safety can actually trigger mushrooming balance sheet liabilities and postpone termination for years. The source of this risk management error is not the usual culprit: lack of conservatism. Rather, it is a misinterpretation of conservatism itself, and a misunderstanding of what constitutes “safe” investment when hedging a plan termination liability (the true cost of transferring risk through lump sums and annuities).
