Defined Benefit Plans Are Sexy Again
The topic of Defined Benefit Plans (“DB Plans”) has been pretty much of a sleeper over the past several years. This could be for the reason that many plans are frozen, or, even more likely, because employers understandably wish to ignore the agony of addressing huge underfunding issues. Lately, issues surrounding Defined Benefit Plans are getting more interesting. It had to happen at some point, with over $2 trillion of plan assets being held in DB Plans and approximately 41 million employees and retirees participating.
The issue at hand is de-risking strategies or strategies designed to lessen or even eliminate an employer’s pension benefit obligations. The goal is to achieve some consistency vs. great volatility for future contributions; and reduce plan-related administrative expenses over time. There are several strategies including various types of annuity contracts--some of which, through the payment of a premium to an insurance company, transfer the responsibility (and the risk) for certain future benefit payments to such insurance company, and eliminate the employer’s or the plan’s or the plan sponsor’s benefit obligations related to affected participants. The release of the obligation has many positive impacts on the financial reporting side and obviously for future cash flows.
As always, each circumstance is different and there is no one-size-fits-all-approach. There are certain possible downsides to consider like PBGC premium protection and employee concerns to name just a couple. Our guess is we will be hearing much more about these strategies and the sleeper days are over for a while for DB Plans.