Is your pension plan fully funded? The answer is relevant to more than individual participants’ accounts, as Bob Collie posits in the Fiduciary Matters Blog. A plan’s funding level also affects how a plan’s assets are allocated and invested, as well as pension de-risking.
Pension plans that are not fully funded may not find it helpful to follow a conservative investment strategy that avoids risk, Collie argues. This is because pension plans raise money through returns on their assets and through contributions from the plan sponsor; if the plan is cautiously invested, the funds will largely come from plan sponsor contributions. And that puts additional pressure on a plan, at least in part due to the Pension Benefit Guaranty Corporation’s increases to its variable rate premiums.
A better approach for plans that are not fully funded is to follow an investment strategy that is more results-oriented, says Collie. He argues that is a way for a plan to achieve funded status and then be able to invest its funds in a more conservative way.
And there’s another factor in play: whether a pension plan is frozen. It was not unusual for employers to take this step during the recent Great Recession, and even during the stubbornly tepid recovery. Freezing a plan can affect how a plan’s funds are invested; frozen plans that are fully funded don’t need a return-oriented investment strategy if there is already enough money in the plan. De-risking is a greater concern for frozen plans, according to Collie, who says that more than 80 percent of the closed and frozen plans in a study by Asset International had a de-risking glide path in place.
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John Iekel is Senior Writer at ASPPA, as well as Editor of the ASPPA Net and NTSA Net web portals.
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