The Wrong Objective Gets One The Wrong Outcome!

The financial press continues to focus on the wrong benchmark for DB plans.  Here is an example of what gets reported all the time: “Utah Retirement Systems returned 7.52% in calendar year 2014, surpassing its benchmark return by 151 basis points and meeting its actuarial assumed rate of return.”

What’s the issue? DB plans only have one true benchmark – their liabilities! A DB plan only exists to meet a promised benefit. In addition, the plan’s liabilities don’t grow at the return on asset (ROA) assumption. The liabilities grow or diminish in value with changes in interest rates.

2014 was a bad year for DB plans, as liability growth far outpaced asset growth.  Utah’s 7.52% may look good relative to some hybrid asset benchmark, but I suspect that the funded ratio and funded status once again deteriorated.

Let’s stop focusing exclusively on assets. If plan sponsors and their consultants had focused more on their specific liabilities, I believe that DB plans wouldn’t have had to rethink their benefit formulas or worse frozen and terminated plans at the rate that they have been.  The US economy cannot afford to have everyone’s retirement be dependent on accumulated balances in defined contribution plans.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s