September 18, 2012 (PLANSPONSOR.com) – A white paper contends defined benefit (DB) plans are positioned to make a comeback.
“We firmly believe the defined benefit plan economics are shifting and will afford employers the opportunity for lower funding costs, thereby positioning defined benefit plans to once again become one of the most cost effective methods of providing adequate retirement income to your employees,” authors of the white paper by Pentegra Retirement Services wrote.
The paper says the factors and economics that caused significant increases in required contributions to defined benefit plans are showing signs of slowing and reversing themselves. The impact of the Pension Protection Act of 2006 (PPA) is passed, as the provisions of this law have been fully phased in.
The authors point out that historically low interest rates, which cause plan liabilities to increase every time they drop, appear to have nearly hit bottom and are poised to begin rising as soon as the Federal Reserve suspends the accommodative support of growth through an expansionary monetary policy. Other underlying macroeconomic trends such as the 30-year bull market in bonds, the decade-long stagnation in the equity markets and the lack of viable options to extend duration for pension investment managers, all exhibit signs of changing for the better.
The paper also notes that the financial crisis that began in 2008 caused sponsors of retirement programs to begin to rethink their strategies, as it became clear that relying solely on defined contribution plans provided inadequate retirement benefits and resulted in participants being unprepared for retirement.
“What we have all needed was a change in the influences impacting employer costs and those changes are underway,” the authors conclude. The white paper, “The Future of Defined Benefit Plans Will Change Dramatically – For the Better,” is here.