Products November 5, 2013

Managing Frozen Pensions No Easy Task

Frozen pension plans are substantially different from open plans and need to be managed accordingly to prevent litigation and ensure positive outcomes for plan participants.
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Issues in frozen defined benefit (DB) plan management comprise the subject of “The Investment and Management of Frozen Pension Plans,” a handbook published by Russell Investments. 

The handbook examines why more than 8,000—or about a third of all corporate pension plans in the U.S.—have barred the addition of new beneficiaries, and how managers within those plans can better meet fiduciary duties.

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Bob Collie, chief research strategist at Russell Investments and one of the handbook’s three authors, said those responsible for the management of frozen plans should base their decisions “not just on what the plan is like today, but on what it will be like in two or five years or further in the future.”

“Funding needs to be built up; investment risk needs to be managed down; governance structures need to be simplified,” Collie said. “The early stages of the path are well trodden, but the later stages are not.”

Bruce Clarke, managing director of client services for Russell Investments, said the process of managing a frozen pension plan is different from an open plan because as plan demographics change—i.e. as average participant age climbs—there is less funding flexibility and greater risk of trapped capital.

“We see more and more frozen plans considering investment outsourcing, and in some more advanced cases the complete transfer of risk through the payment of lump sums or the purchase of annuities,” Clarke said.

Handbook authors divided the guide into three sections exploring pension funding policy, investment policy and risk transfer.

Specific subjects tackled in the handbook include the following:

 

  • Impacts of demography of frozen pension plans
  • The effects of freezing on funding policy flexibility
  • The change in what it means for a frozen plan to be “fully funded”
  • Issues of “trapped capital” and liability-responsive asset allocation
  • The need to define a “final endgame” for the frozen plan.

 

Pension plan sponsors and advisers can request a copy of handbook here.

Data & Research November 5, 2013

Preparing for Spending in Retirement

Retirement plan advisers can assist people after retirement with rollovers and sensible spending strategies, a Vanguard paper said.
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Education is needed to help prepare participants for spending once they retire, said the authors of  “A More Dynamic Approach to Spending for Investors in Retirement,” from the investment and retirement services provider.

The paper, by Colleen Jaconetti, Francis M. Kinniry Jr. and Michael A. DiJoseph, examines two common postretirement spending strategies and recommends a third.

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Once a participant is retired, retirement plan advisers can help him with the logistics of rolling over his retirement plan balance and actually setting up a post-plan portfolio from which he can draw retirement income, Jaconetti said.

“Advisers can work with the new retirees to establish spending rules and figure out a schedule for reviewing and updating their portfolio, perhaps every six months or a year,” Jaconetti said. One approach to consider is creating a money market account for the retiree and directing his Social Security, required minimum distribution and portfolio gains there.

The first strategy is termed “dollar amount grown by inflation,” where the retiree chooses an amount of spending in the initial year of retirement and the amount is increased annually to account for inflation.

The second strategy, called “percentage of portfolio,” bases the retiree’s annual spending on a stated proportion of his portfolio’s value at the end of the prior year. The third approach, “percentage of portfolio with ceiling and floor,” advocates relatively consistent postretirement spending, while remaining responsive to the financial markets’ performance to help sustain a retiree’s portfolio.

The paper recommends flexibility as a prudent spending strategy. Periodically evaluating their income strategies, assessing their portfolios and considering whether alterations are needed can help people with their long-term financial planning.

Postretirement Strategies

Both retirement plan sponsors and plan advisers can assist people in carrying out strategies related to their postretirement spending.

“One way that plan sponsors can help out participants is to talk to them about how much they can spend once they retire,” Jaconetti, senior investment analyst for Vanguard Investment Strategy Group, told PLANADVISER. “Help them to create a paycheck for life.” In addition to helping participants determine how much they can spend annually once they retire, plan sponsors can also help educate them about how to set up a portfolio and the asset allocation of that portfolio.

 “If participants can accept fluctuations in spending due to the changing performance of the markets, they can figure out how to adapt their spending, cutting back in certain areas, for example, if the markets don’t do well that year,” said Jaconetti. She added that, by putting guardrails around annual postretirement spending, in order to factor in the aforementioned fluctuations, participants will have a cushion that will hopefully maintain adequate retirement income over the long term.

There are several things for participants to consider when it comes to both preparing for retirement and then for postretirement spending, said Jaconetti. Maintaining a broad diversification of investments is helpful, as is taking a realistic look at life expectancy and working. “While life expectancy is something that people can’t control, they can look into working longer, which gives them time to save more and ultimately results in a higher amount that can be spent during retirement,” she said.

A copy of the paper can be found here.

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