Ask the Experts September 29, 2015

(b)lines Ask the Experts – Must a Frozen 401(a) DB Plan Be Terminated?

“I read with great interest your Ask the Experts Q&A on frozen plans, since our organization has a frozen Employee Retirement Income Security Act (ERISA) 401(a) plan as well.
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“However, in our case, it is a defined benefit plan, not a defined contribution plan. Does this change your response at all with respect to plan termination?” 

Michael A. Webb, vice president, Cammack Retirement Group, answers:  

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All of the elements of our response to the previous question regarding 401(a) defined contribution plans would apply to defined benefit (DB) plans as well. However, due to funding and other concerns, DB plans that are subject to ERISA can be more difficult to terminate, which is why it is not uncommon to see frozen DB plans remain frozen for long periods of time prior to termination.

Specifically, frozen DB plans often do not have sufficient assets to pay out benefits to all participants, which is required when a plan is terminated. What occurs on many occasions is that the plan sponsor attempts to fund the asset shortfall over several years, and then terminate the plan when it is fully funded in what is called a standard termination.

In addition there are some ongoing administrative obligations which are unique to frozen ERISA DB plans, such as the payment of Pension Benefit Guarantee Corporation (PBGC) premiums, recognition of the plan on the sponsoring employer’s balance sheet, and satisfaction of minimum funding requirements. For an excellent assessment of all of the issues associated with freezing and terminating defined benefit plans, this article certainly fits the bill. As an aside, you may recognize one of the authors!

Thank you for your question!

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.
Investing September 28, 2015

Retirement Plan Investors Abandoning Asset-Class Preference

More investors are turning to unconstrained multi-asset class solutions, a survey suggests.
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Between 2013 and 2015, the number of investors indicating they would use multi-asset class funds in the subsequent three years increased significantly across multiple investor types, according to the findings of a survey by CREATE-Research and commissioned by the Principal Financial Group.

The research report, “Asset Allocation: Survival of the Fleetest,” analyzes data from the 2013 to 2015 CREATE-Research surveys, with a focus on asset allocation investment trends in the defined benefit, defined contribution, retail, and high net worth investor classes. While the search for yield is nothing new, it has intensified significantly in the two years analyzed.

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Investors are abandoning their asset class preference for a multi-asset approach that chases short-term opportunities in the face of valuation-distorting quantitative easing programs in the United States, Europe and Japan.

The survey finds defined benefit (DB) plans have increasingly favored infrastructure and real estate (for capital growth, inflation protection and regular income), traditional passive funds, global equities, low-variance equities and alternative credit (for high yield). During the same time, bonds and emerging market equities and bonds have fallen out of favor.

Defined contribution (DC) plans have moved toward advice-embedded products and increasingly favor diversified income and diversified growth funds; target-income, target-date and target-risk retirement funds, and passive equity/bond funds; while actively managed equities and bonds showed a decline.

“Asset allocation, with a focus on outcome-oriented investing, has taken on a new importance for investors as they seek to manage market volatility and ultra-low interest rates,” says Julia Lawler, senior executive director of Principal Portfolio Strategies, an asset allocation boutique of Principal Global Investors. “With an eye toward retirement, they seek a wide range of investment strategies using a blend of bond and conservative equity exposure to provide diversification designed to deliver an income stream and capital appreciation, while reducing volatility risk. More than ever, asset allocation is an important strategy across all investor groups.”

The findings are based on a survey of more than 700 pension plans, sovereign wealth funds, asset managers, pension consultants and fund buyers across 29 fund jurisdictions, with a combined AUM of $26.8 trillion. The report is available at https://www.principalglobal.com/knowledge/insights/asset-allocation-survival-fleetest.

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