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Funded Status, How Plan Funds are Invested Increasingly Linked

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.