Benefits July 22, 2007

PD2007: Despite DB Travails, A Plan Sponsor is Convinced

CHICAGO - The current trials and travails of defined benefit plans aside, should plan sponsors still consider opening - or reopening - their own?
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Ask Sandra Lamparello, Vice President of Human Resources, Sumitomo Mitsui Banking Corporation (SMBC), and you will get an enthusiastic answer.

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“I am a defined benefit advocate,” Lamparello told a conference panel on DB plans at PLANSPONSOR’s recent PLAN DESIGNS conference. “I think very highly of DB plans.”

Lamparello’s upbeat assessment comes from the personal experience of dealing with the April 2001 merger of Sakura Bank and Sumitomo Bank to form Sumitomo Mitsui Banking Corporation and the ensuing discussions about putting together Sumitomo’s DB plan with the other company’s 401(k) program.

Officials working on the matter finally decided to have new hires and workers from Sakura Bank would go to a cash balance plan and existing Sumitomo employees went with the traditional DB arrangement. She said the merged company’s retirement plan arrangement – that kept the 401(k) plan – has played to good reviews from the bank’s workforce.

“Employees are happy with what have on board,” she told conference attendees. “They understand it better and they know what they are going to get at the end of the day.”

Lamparello said her company is now considering adding a 401(k) feature that will allow participants to take all or part of their balance and put it into a guaranteed income product (See Barry’s Pickings: Lifelong Concerns ).

Volatility as a Problem

In discussing the issue of DB plan volatility – a frequent reason offered for DB freezes – Stewart D. Lawrence, Senior Vice President and National Retirement Practice Leader, The Segal Company told the group:

  • Plan sponsors only putting in the least amount required may be creating their own issue. “You don’t have to contribute at the minimum,” Lawrence asserted. “It’s only at the minimum where it’s volatile.”
  • Final average salary arrangements are less volatile.
  • Liability-driven investment (LDI) strategies can help control the plan’s ups and downs (See Fighting Fire with Fire ).

Lawrence said DB sponsors who skated through the heady 1990s without building a plan balance through their contributions are now suffering the consequences. “They paid for that with volatility because they were flying on the edge,” he told the panel audience.

In a related issue, Chattanooga, Tennessee adviser R. Todd Gardenhire, Senior Vice President Wealth Management, Smith Barney, told the group that the Pension Benefit Guaranty Corporation (PBGC), the nation’s private-sector pension insurer, has had to bring in an adviser on how to deal with the range of alternative investments now in the agency’s portfolio from seized plans.

Gardenhire was recently named by the White House as chair of the PBGC Advisory Committee (See Bush Announces PBGC Advisory Panel Appointments ).

The reason for the alternative investments: desperate sponsors have opted for riskier and riskier investments in the hope they can produce a handsome enough return to avoid having to pay into their financially shaky plans. “They’re stretching for gold to avoid having to make a contribution,” Gardenhire told the group. “In the bottom ones, they have to stretch for gold because they can’t afford to contribute.”

Benefits July 20, 2007

Retirees Still Offered Health Benefits but Share More Cost

July 20, 2007 (PLANSPONSOR.com) - The percent of firms offering retiree health benefits has remained constant between 2000 and 2006, according to a new Chartbook from the Commonwealth Fund.
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Highlights from the Chartbook said, 94% of active public-sector employees are currently on track to be eligible for retiree health benefits after they retire and become eligible for Medicare, compared with 58% of private-sector employees. Offer rates for large firms (200+ workers) are far higher (35%) than those for small firms (3-199 workers) (9%), according to the Commonwealth Fund’s research.

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During the past two years, about a quarter of both public and mid-size private employers increased the retirees’ share of health care premiums, and one-third of both public and mid-size private employers increased retiree cost sharing for prescription drugs.

According to the study, monthly premiums for Medicare-age retirees averaged $318 for mid-size private firms and $320 for public employers. Premiums increased 9% for mid-size private firms from 2004 to 2005, and 5% for public employers. Medicare-age retirees from mid-size private firms contributed an average of $76 monthly towards premiums, compared with $116 for retirees from public employers.

Prescription Coverage and Medicare Part D

The vast majority of firms that offered retiree health benefits to Medicare-age retirees in 2005 said they would continue to offer some level of prescription drug coverage to these retirees in 2006. Many firms said they did not know how they would structure their prescription drug benefit for Medicare-age retirees in 2006, but the majority of firms reported they would offer a drug benefit that was at least actuarially equivalent to part D.

Approximately three-quarters of Medicare-age retirees in both public and mid-size private firms had a three- or four-tiered cost sharing arrangement for prescription drugs. Approximately half of all firms are planning to increase retirees’ cost sharing for prescription drugs during the next two years.

The complete Chartbook can be downloaded from here .

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