The demise of the traditional defined benefit plan (DB) and the movement of most employees to defined contribution plans (DC) is creating a retirement crisis in the U.S. According to the DOL, the U.S. pension industry has seen the number of DB plans go from nearly 150,000 in the 1980s to fewer than 24,000 today, and many of those plans have had benefits frozen for new employees.
Why has this trend unfolded? Well, there are multiple reasons, but for many private sector companies the carrying of the pension liability on their balance sheet and the volatility of contribution expense potentially impacting the income statement was just not acceptable. But the pension crisis isn’t just impacting private sector plans. Public funds and multi-employer plans are also suffering under the weight of declining funded ratios and rising pension expense.
In addition, the capital markets have contributed significantly to this unfolding story, as interest rates have plummeted during the last 30+ years, while equity markets have witnessed two major corrections in the last 15 years. Declining asset values and rising liabilities have combined to create dangerously poor funding levels for many states, municipalities and union plans. Regrettably, this situation has been made worse by the reluctance of plan sponsors and their consultants to pursue a different strategy.
Many in the retirement industry continue to create investment structures and asset allocation strategies that are based on the return on assets assumption (ROA), as opposed to a plan’s true benchmark, which is that plan’s unique liabilities. Had these advisors chosen a more original approach they likely would have had greater exposure to fixed income assets during this 30 year bull market for bonds, which would have left them with less exposure to equities and the two major market declines for that asset class.
Institutional inertia continues to plague our industry, and unless we begin to consider a different path, I fear that our beneficiaries will not get the benefits that were promised. The movement away from DB plans is placing an undo burden on many of our employees to fund and manage a retirement program without the necessary skills to successfully accomplish this task. The social and economic ramifications may be quite grave.