DB or not DB?

DB or not DB?  That is the question!

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Okay, I’m no poet, but if I were, I might want to adapt the iconic line “To be or not to be” from William Shakespeare’s Hamlet to open the first scene of my defined benefit (DB) play. (I wonder if any of my actuary friends can act? Probably not!)

I want to discuss a topic many companies are struggling with today – whether or not to continue to sponsor their DB plan. In other words “DB or not DB”?

When analyzing a DB plan, there are many factors that should be considered. In addition, an organization’s entire benefits program should be reviewed to determine what place the DB plan has. Here are some questions that should be asked:

Human Resources/ Overall Benefit Structure Company Finances Employee Relations
Is the current DB plan meeting overall human resource goals? Can you afford your DB plan in its current form? Do employees understand and value the current DB plan?
Does your company have a paternalistic or employee empowerment philosophy? Is cost volatility a challenge for your company? How important is your DB plan to meeting your employees’ retirement goals?
Do you need a DB plan to recruit and retain employees? Are accounting disclosure requirements a concern for your organization? How much responsibility do you want employees to bear for their retirement?

After a DB plan sponsor has asked themselves these questions, they will be better prepared to consider one of the following three options:

• Option 1 – Keep or modify the current plan (including consideration of a cash balance plan design).

• Option 2 – Freeze the plan. This includes a soft freeze (no new entrants/existing participants continue to accrue future benefits) or hard freeze (no new entrants/existing participants stop accruing future benefits).

• Option 3 – Plan Termination.

The DB retirement industry offers many tools that can be utilized to help analyze these options, including a replacement ratio analysis, retirement readiness studies, actuarial funding/accounting projections and plan termination studies to name a few.

As I discussed in my prior blog, a plan design change is just one of several options a plan sponsor can consider when managing their risks associated with their DB plan. Regardless of the path chosen, asset/liability management strategies will be an important determinant of the success of a DB plan. In my next blog I’ll be discussing an additional risk management option – Liability Driven Investing (LDI).

In addition to blogging here, I also tweet regularly about DB topics of interest. Click to follow me on Twitter- @scottruba.

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Affiliation Disclosures

While this communication may be used to promote or market a transaction or an idea that is discussed in the publication, it is intended to provide general information about the subject matter covered and is provided with the understanding that none of the member companies of The Principal are rendering legal, accounting, or tax advice. It is not a marketed opinion and may not be used to avoid penalties under the Internal Revenue Code. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements.

Insurance products and plan administrative services are provided by Principal Life Insurance Company a member of the Principal Financial Group® (The Principal®), Des Moines, IA 50392.

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