10 Ways to Make Sure a DB Plan Is Sustainable
In an era when defined contribution plans are increasingly the employer-provided retirement plan norm, it may seem counterintuitive to offer a defined benefit plan. Nonetheless, says recent research, that is exactly what many employers are doing. And those that do need to make sure their DB plans are sustainable amid the many pressures that militate against that.
In “10 Strategies to Make DB Plans Sustainable,” Willis Towers Watson found that the reason many employers continue to offer DB plans is simple: employees like them, and retirement security and guaranteed benefits are among the reasons.
But that attractive benefit requires care and feeding. Willis Towers Watson offers ideas regarding what can be done to make sure a DB plan is sustainable.
Compliance/governance. Establish and document compliance processes, including how decisions are made. The report suggests that factors that should be part of the governance framework include clearly defined responsibilities regarding:
- plan document compliance;
- administrative practices; and
- legislative and regulatory changes.
Plan design should:
- support the employer’s employee benefit philosophy;
- efficiently use the sponsor’s investment;
- encourage employees to retire once they have attained retirement readiness; and
- evaluate the design of their plans as circumstances and condition of the employer and its workforce change.
It is important to make sure that plan data is of high quality, since that is especially important in processing transactions and forecasting the financial impact changes to the plan could have.Communication.
Direct and personalized communications — timed so as to heighten their relevance to key life events — are more effective in helping participants to understand the value of the DB plan, Willis Towers Watson says.Plan assumptions.
The report advocates periodic review of plan assumptions, as a way to make sure they are based on the most recent information and account for factors such as changes in laws and regulations, market conditions and plan experience.Plan costs.
It is important to remember, the report says, that monitoring costs means more than just paying attention to fees; it also entails paying attention to:
- investment management expenses; and
- Pension Benefit Guaranty Corporation premiums.
The report warns against skipping plan funding contributions and argues that a long-term funding approach will help ensure that contributions will be made regularly and obviate future problems.Plan liabilities.
Pay attention for opportunities to cut plan liabilities. Among the ways this can be accomplished, the report suggests, is to make periodic, small-amount bulk lump-sum sweeps or an ongoing lump-sum offer.Investment policy.
The plan’s investment policy, Willis Towers Watson says, should:
- align with the employer’s objectives; and
- be clear on goals for investment return and risk tolerance.
Define and monitor the plan’s risk tolerance.