The low level of interest rates present a big challenge for defined-benefit plans, now and into the future, but it's not too late for plan sponsors to act.
Plan sponsors must start by asking the right questions and understanding their liability, because the long-term low-interest rate environment is just one of many challenges facing DB plans.
Other challenges include:
- Sharply rising Pension Benefit Guaranty Corporation (PBGC) premiums - Constantly changing regulatory environment - Updated mortality tables, which reflect longer life expectancy - Lower expected future capital market returns
As we work with plan sponsors, even plans that were frozen to new participants five years ago are still underfunded due to the reasons listed above.
It's true….many employers are paying out more in monthly benefits to participants, investment fees, actuarial fees and administrative fees, THAN THEY ARE CONTRIBUTING ANNUALLY. Now is a good time to bring in a third-party adviser or consultant to help you understand the costs of your plan, how to build a strategy for the future and whether or not it makes sense to manage or transfer the risk.
An adviser that understands DB Plan Risk Management can help you...
An adviser can help you decide whether the risks associated with your DB Plan can be managed through plan design changes or liability-driven investing, or whether or not the risk should be transferred.
No matter what you decide to do as your next step, it is important to stop the bleeding and look for ways to get your plan funded up. It is worth considering that with interest rates so low, companies can borrow and then get rid of their liability at a lower cost than making up the shortfall themselves over time.
DB plans are intended to help provide a secure retirement for employees and an adviser that is able to offer unbiased strategies and advice can help you reach that goal while also protecting your business from what is likely a growing liability.
David H. Hinderstein is the Founder and President of Strategic Retirement Group (SRG), an independent and full service retirement plan consulting firm and industry leader in the Not-for-Profit and Corporate sectors.