A New Day for DB Plans

As PLANSPONSOR's 2006 DB Summit in Washington, DC commenced, the message from the opening plenary speaker was "It is a new day for DB plans!"

conference audio available at http://ww2.plansponsor.com/dbsummit06audio/01-opening-remarks.m3u

Ron Gebhardtsbauer, Senior Pension Fellow, American Academy of Actuaries, pointed out the problems plaguing defined benefit pension plans in the ’80s and ’90s have been addressed. The so-called “perfect storm” is over, underfunding is an “old story” as plans are already less underfunded than they once were, the Pension Protection Act (PPA) of 2006 provided new funding rules, and also clarified the age discrimination issue for cash balance plans going forward (see The Pension Protection Act: This Changes Everything ).

While DB plans are not out of the woods yet as far as their reputation for being costly and burdensome, due in part to the unknown effects of current and future accounting rules from the Financial Accounting Standards Board (FASB), they still make sense, Gebhardtsbauer said, especially for union and government employees. Employees want DB plans and they are a good retention tool for employers. He believes the new funding and accounting rules will not end DB plans, however the key to preserving them will be to change the attitude of top management toward the plans.

401(k) No Panacea

According to Gebhardtsbauer, 401(k) plans are not a panacea for employers wanting to provide employees a retirement benefit that does not create a great cost or risk for the company. Risks of 401(k) plans he points to are the potential of a mass loss of workers who want to get their money when the market is good and account balances are up, as well as the inability to encourage early retirement of workers to help the company financially when the market is down as account balances will also be down then. Gebhardtsbauer said both DB and DC elements are essential to a retirement benefit offering for both employers and employees. Hence, the somewhat recent introduction of hybrid plans.

One radical solution Gebhardtsbauer suggested for helping top management appreciate DB plans is to require their non-qualified deferred compensation plans to mimic the DC plan offered to the general employee population. This move might help top management see what is lacking from their DC offering.

In conclusion, Gebhardtsbauer said the future of defined benefit pension plans depends on how many prospective employees demand them and the attitude of top management toward them. He challenged DB Summit attendees not to give up on DB plans, but to consider what can be done to improve on them and encourage their use.