A new analysis finds that company sponsored defined benefit plans while dwindling in frequency since this generations Great Recession - need to do more to de-risk their liabilities in order to pay out retirement benefits to the American workforce.
Terry Dunne, managing director of the rollover solutions group at Millennium Trust, a financial services company that offers custody solutions to institutions and individuals, says that more active management of these hazards is warranted. These options include decisions on plan design, funding and investment and settlement procedures.
Since 1985, Fortune 100 retirement plan sponsorship has gradually reversed from DB to hybrid or full-blown defined contribution plans. Back then, there were 90 DB plans in the grouping and today there are only 30 pensions left, according to Towers Watson data.
It seems to me although a number of organizations like Ford and General Motors very publicly showed what they were doing in the areas of de-risking strategies in 2012, says Dunne, who warns that many organizations that will use those strategies over the next couple of years to solve problems that they have right now.
Department of Labor statistics show that DB plans in total have dipped from over 175,000 in 1983 to more than 45,256 in 2011. However, total assets increased over that time period by nearly $1.8 billion to $2.5 billion.
Strategies such as liability driven investments (which craft investment solutions around increasing assets to sustaining liability and benefit payments) and lump-sum offerings have been used widely, according to a recent Millennium Trust white paper.
With an average funded ratio of 95% for DB plans in the corporate sphere, coupled with a slowly rising interest rate market and bear stock market, Dunne predicts that plans sponsors will take further action in managing risk after returning back to pre-2008 levels.
When youre well-funded you have opportunities to do things and so I think youll see a lot of big organizations, mid-sized and small doing things to fix their situations, Dunne explains.
With capital markets improving, Dunne says that DB plan sponsors will likely keep a close eye on day-to-day developments within their investment portfolios. He notes that nothing is locked-in, its ever-changing and said changes were possible should interest rates or the market shift
Another option is lump sum payments, which allows retirement plan sponsors to eliminate the liabilities associated with paying benefits monthly by unloading large payments to participants. Dunne points out from Towers Watson data that 62% of participants opt for the lump sum.
The nicest feature is that by paying out some of the liabilities you sort of reduce the size of your liabilities and therefore, if you have future volatility, its less important to you, Dunne says, while noting that the lump sum is a choice that plan sponsors are choosing because they are getting a high level of acceptance from the participants.
Also, annuities options can also allow for buy-outs and buy-ins into the DB plan structure.
