DB and DC Sponsors Confront Risk Issues

A poll of corporate finance execs by CFO Research Services in collaboration with Prudential Financial found that the executives are already moving to put in place a better way to measure risk as well as to help minimize it.

Sixty four percent of respondents say they have adopted risk management strategies such as a liability driven investment (LDI) strategy or are very likely to do so. Respondents also say they are now considering adopting risk mitigation tools such as Value at Risk analysis.

But the DB sponsor risk mitigation activities go farther than that, according to the survey. Sixty-six percent say their companies are very likely to adopt (46%) or have already adopted (20%) a more-conservative asset allocation strategy. To find out exactly where they stand riskwise, 74% say their companies are very likely to conduct (45%) or have already conducted (29%) a formal risk assessment.

Financial Impact

The financial stress caused by their DB plans is affecting companies’ commitment to their plans, the finance officials reported in the survey. Some 22% of respondents indicate they are very likely to freeze or terminate their DB plans, and 25% say they are somewhat likely to do so.

Forty-five percent of respondents report that their DB plan’s performance has had a substantial effect on their company’s financial performance over the past year, while 41% also report that their DB plan’s performance has had a substantial effect on their company’s financial health.

“As employers and employees work together to manage through a changed risk and investment landscape, the finance executives who participated in our survey seem devoted to steering their retirement benefit plans back on track,” researchers wrote in the survey report. “With time, effort, and thoughtful attention, retirement benefit plans could emerge from this crisis stronger and better positioned for the long term than they were before. Finance executives seem to be committed to making that hope a reality.”

The poll of corporate finance execs by CFO Research Services in collaboration with Prudential Financial found 42% of respondents say they are very likely to limit high-risk investments for their DC plans as well.

Respondents also report that their companies are very likely to add investment products that offer some protection against market declines (44%) as well as more-conservative target-date funds to their DC plans (38%), in line with a renewed focus on protecting employees' portfolios from disruptive market performance.

In their views on automatic enrollment, finance executives confirm a migration toward DC plans that better support employees' retirement planning. Forty-two percent of respondents say their companies are very likely to increase automatic enrollment and contribution escalation efforts. Respondents are less likely to say they will increase funding for DC plan education in the next two years.

The survey covered 140 senior-level finance executives. The report is available here .