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Maintaining a healthy defined benefit pension fund is a competitive advantage to plan sponsors and can give employers an option for providing retirement income for plan participants, according to speakers during a panel at the 2024 PLANSPONSOR National Conference in Chicago.
Continuing to offer a DB plan provides a value advantage to plan sponsors by giving participants a “guaranteed benefit,” explained Rob Massa, managing director and retirement practice leader at Qualified Plan Advisors.
Plan sponsors can use their DB benefit to support their workers to create a stream of income in retirement, as pension plans have clear, demonstrated value to beneficiaries, added Massa.
“A lot of this conference has been talking about guaranteed lifetime income, and DB plans were the guaranteed lifetime income benefit that so many of our parents or grandparents grew up with,” he said. “We’re coming full circle with [defined contribution plans] and saying, ‘how do we make these things income tools?’”
Plan sponsors with existing or frozen DB plans, that are in surplus and considering plan termination could decline to close the plan, switching their outlook about the pension to use it as competitive differentiator for workforce recruitment and retention.
Maintaining a pension “is [an] incredibly competitive [advantage], certainly in the corporate DB market, [because] very few remain,” Massa added. “it’s not a common benefit, so it’s a huge advantage for competition for talent to say, ‘hey, we provide some kind of monthly income benefit [in] retirement through a pension plan.”
Milliman and Principal Asset Management research on pension plan funding found plan sponsors in the current market have a singular opportunity to choose to protect funding levels, terminate the pension entirely or accelerate de-risking of DBs as the funded status of many has improved to reach fully funded and near-to-fully funded status.
Instead of continuing to de-risk or terminate a pension, by switching their thinking plan sponsors also have opportunity to improve their participants’ prospects for generating lifetime income, added Brian Donohue, partner at October Three, an actuarial services provider.
Plan sponsor IBM reopened its frozen cash-balance plan in 2023 while ending contributions to the defined contribution plan and making 5% contributions instead to the DB plan for all the DC participants. The IBM DB plan was frozen to new hires in 2006.
Donohue’s message to DB sponsors: “you currently have a mechanism for providing retirement income that is unbeatable,” he said. The pooled pricing of risk attainable in DB plans cannot be beat in a DC plan, he added.
“Actuarial 101 [is] if you’re going to underwrite one life, there’s a wide range of potential ages of death [but] get 100 lives, you’re going to see that that expected average age really narrow down,” he added.
Donohue said he is “skeptical that any DC [plan] income solution ever is going to be competitive because I don’t see how they get past the individual versus pooled pricing,” he said. “A lot of people [are] looking around for retirement income solutions [and] I’ve seen 20 years of DC retirement solutions: They can’t compete,” Donohue said. “I don’t see how they can ever get past that mortality pool problem.”
Before entirely terminating a DB, plan sponsors should try to discern the total value it provides, he added.
“Employers should understand that they have a DB plan that provides this mechanism to deliver higher retirement income than people can find elsewhere,” Donohue said. “And because of the way the rules work inside DB plans, it is especially true for women—where they’re going to get dinged in the private [annuity] market because of their longer life expectancy, but in a DB plan, they can get a better benefit.”
Using the DB plan strategically, removing some participants via voluntary early retirements, “in some situations actually provides a pretty big advantage to plan sponsors that want to manage their workflow and their people,” concluded Paul Moore, senior vice president, workplace consulting at Fidelity Investments.