By: Russ Kamp, Managing Director, Ryan ALM, Inc.

Let me start off by stating unambiguously that I’m a huge supporter of defined benefit (DB) plans. Despite many recent improvements in defined contribution (DC) plans, such as auto-enrollment, auto-escalation, etc., I believe that DC plans should not be anyone’s primary retirement vehicle and that they should maintain their role as a supplemental to traditional pension plans. I maintain that asking untrained individuals to fund, manage, and then disburse a “benefit” with little to no disposable income, investment acumen, or a crystal ball to help with longevity and drawdown issues is an incredibly difficult task.

Given that we’ve had four plus decades of DC usage, how are we doing? According to the following information from Fidelity that runs through March 31, 2024, I’d say not very well. Would you disagree?

Importantly, there is a fairly significant subset of the American workforce that doesn’t have access to any employer sponsored plan – DB or DC. This is particularly troubling since most people don’t save outside of an employer sponsored plan. That reality makes the above information that much worse. That said, the fact that those in their 50s have a median balance (can we please stop using average balances) of only $64,300, how dignified will their golden years be? According to the St. Louis Federal Reserve’s data base (FRED), longevity for the average American is about 77.4 years. If one retires at 65-years-old and lives an average life that $64k will have to cover roughly 13 years which translates into almost $5,000/year ($416/month) before any investment gains or losses throughout the coverage period.

Given this reality, we need to double-down on our effort to protect and preserve DB pension plans. Refocusing on the true pension objective of SECURING the promised benefits at both a reasonable cost and with prudent risk would go a long way to reducing the volatility associated with funding these critically important funds. The current US interest rate environment is providing plan sponsors with the opportunity to reduce risk within a traditional asset allocation framework. As the funded status improves, more risk can be withdrawn from the asset allocation further stabilizing the funded ratio and contribution expenses. Given the information provided by Fidelity, we truly can’t rely on DC offerings as anyone’s primary retirement vehicle. It is time to act.