From Frozen to Terminated – Effective Execution of a DAA Strategy

Terminating a hard-frozen defined benefit (DB) plan starts with getting  an appropriate asset allocation strategy.  This is where Dynamic Asset Allocation (or DAA) comes into play.

A DAA strategy helps plan sponsors transition from equity to bond investment options as their plan’s funding improves – think of something like a glide path.  This strategy is becoming more popular and is effective for plan sponsors looking to terminate their hard-frozen plans.

Custom glide path

To help arrive at the lowest cost to fully fund a plan termination, a custom glide path is key. A custom glide path allows a plan sponsor to make adjustments dynamically to their asset allocation based on changing market conditions. It works by adjusting the asset allocation to the changes in the plan’s funded status and is based on real time termination funding ratio data.  As plan assets and liabilities come into balance (meaning assets = liabilities), plan sponsors can minimize the impact unfavorable economic variables may have on either increasing the time or contributions needed to terminate the plan.

It takes a team

For DAA to be successful, a team of professionals must work together.  The team may include the plan sponsor, Actuary, Investment  Advisor, Financial Professional or Consultant and any other plan service providers.

An experienced team of professionals can bring know-how and best practices to the table which can help plan sponsors reduce costly mis-steps during the termination process.

It takes a team

As plan assets and liabilities come into balance, investments that protect the plan’s funded status should be used.  The administrative part of the termination process – which will be the focus of my next blog – can take between 12 and 18 months, during which time the plan’s funded status is still at risk.

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Affiliation Disclosures

The subject matter in this communication is provided with the understanding that The Principal® is not rendering legal, accounting, or tax advice.  You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements.

Asset allocation/diversification does not guarantee a profit or protect against a loss. Use of dynamic asset allocation does not guarantee improvement in plan funding status nor the timing of any improvement.

 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.