Dorann Cafaro, General Partner, Cafaro Greenleaf, told attendees at the conference that there are reasons to stay in the DB space. She referred to a 2010 Aon Hewitt survey that found 78% of employers that offer a DB plan will continue to offer them. She added that another survey found 60% of new employees chose their employer because of a DB plan and most plan to stay with an employer that offers a DB plan longer.In addition, Cafaro said the National Institute for Retirement Security (NIRS) reports that a DB plan costs 46% less to deliver the same income benefit as a defined contribution plan.
Cafaro said that DB plans protect savings since employees can’t borrow or withdraw money before retirement, and DB plans reduce certain risks. Investment risk is reduced because DB assets are managed professionally; interest rate risk is reduced because DB plans can match assets to liabilities; and longevity and mortality risk is reduced because of asset pooling – less income is paid out to those who live a short time and the money stays in the plan.
Cafaro says DB’s have been attacked because legislative changes have made reporting and accounting more difficult.
She suggests a new participant-driven solution. Similar to target-date funds, DB plans could have assets that match the timing of retirement. For example, if a certain number of participants are retiring next year, the plan should invest in assets that mature in one year. Likewise, the DB plan could have assets that mature in five years, 10 years, or whenever retirement “waves” are expected.
Geoffrey M. Strunk, J.D., SVP and General Counsel, ExpertPlan Consulting Services, advocated the use of cash balance plans, saying they are the best of both worlds. They provide a guaranteed benefit, and are also a significant benefit plan for younger, short-term employees.
In addition, they are protected by the Pension Benefit Guaranty Corporation (PBGC), and the issue of whether they are age discriminatory has been resolved by federal courts and the Pension Protection Act, which adopted the view of five federal appellate courts that when determining discrimination, one must look at the benefits going into the plan and not those coming out.
Finally Michael Devlin, Principal, BCG Terminal Funding Company, contended that terminating DB plans presents a real opportunity for advisers. When a plan terminates the assets must either be paid as a lump sum or annuity to participants. Devlin said in his firm’s experience, 90% of participants take a lump sum.
After educating participants on their options, advisers can capture IRA assets, sell annuities, or boost up the assets of the same sponsor’s DC plan with rollovers.