Regrettably, defined benefit (DB) plans are being frozen and/or terminated at an alarming rate. Why? Could it be that the plan sponsor and asset consulting community has been focused on the wrong objective? For both public and multi-employer plans, sponsors are laser focused on trying to meet the return on assets (ROA) assumption. But, is that the real goal?
At KCS and Ryan ALM, we believe that the true objective of any DB plan, private or public, is meeting the promise (benefit) at the lowest cost possible. It is not trying to generate the greatest return. Injecting more risk into the asset allocation process achieves one goal – getting more risk! It does not guarantee a greater return.
In this market environment in which both equities and bonds have enjoyed lengthy bull markets, how likely are we to see meaningful longer-term returns that will help plan sponsors achieve the ROA? Not, likely! Injecting more risk in this environment could potentially sabotage the funded status should the equity and bond markets experience a significant decline.
Sponsors of DB plans cannot afford a further increase in contribution expense. Focusing on delivering the promise at the lowest cost might potentially reduce the plan’s returns in the near-term, but this de-risking approach is likely to stabilize both the funded status and contribtion expense, while preserving this important benefit for the long-term.
You know where we stand on this subject. What do you feel is the true objective?