“I am a defined benefit advocate,” Lamparello told a conference panel on DB plans at PLANSPONSOR’s recent PLAN DESIGNS conference. “I think very highly of DB plans.”
Lamparello’s upbeat assessment comes from the personal experience of dealing with the April 2001 merger of Sakura Bank and Sumitomo Bank to form Sumitomo Mitsui Banking Corporation and the ensuing discussions about putting together Sumitomo’s DB plan with the other company’s 401(k) program.
Officials working on the matter finally decided to have new hires and workers from Sakura Bank would go to a cash balance plan and existing Sumitomo employees went with the traditional DB arrangement. She said the merged company’s retirement plan arrangement – that kept the 401(k) plan – has played to good reviews from the bank’s workforce.
“Employees are happy with what have on board,” she told conference attendees. “They understand it better and they know what they are going to get at the end of the day.”
Lamparello said her company is now considering adding a 401(k) feature that will allow participants to take all or part of their balance and put it into a guaranteed income product (See Barry’s Pickings: Lifelong Concerns ).
Volatility as a Problem
In discussing the issue of DB plan volatility – a frequent reason offered for DB freezes – Stewart D. Lawrence, Senior Vice President and National Retirement Practice Leader, The Segal Company told the group:
- Plan sponsors only putting in the least amount required may be creating their own issue. “You don’t have to contribute at the minimum,” Lawrence asserted. “It’s only at the minimum where it’s volatile.”
- Final average salary arrangements are less volatile.
- Liability-driven investment (LDI) strategies can help control the plan’s ups and downs (See Fighting Fire with Fire ).
Lawrence said DB sponsors who skated through the heady 1990s without building a plan balance through their contributions are now suffering the consequences. “They paid for that with volatility because they were flying on the edge,” he told the panel audience.
In a related issue, Chattanooga, Tennessee adviser R. Todd Gardenhire, Senior Vice President Wealth Management, Smith Barney, told the group that the Pension Benefit Guaranty Corporation (PBGC), the nation’s private-sector pension insurer, has had to bring in an adviser on how to deal with the range of alternative investments now in the agency’s portfolio from seized plans.
Gardenhire was recently named by the White House as chair of the PBGC Advisory Committee (See Bush Announces PBGC Advisory Panel Appointments ).
The reason for the alternative investments: desperate sponsors have opted for riskier and riskier investments in the hope they can produce a handsome enough return to avoid having to pay into their financially shaky plans. “They’re stretching for gold to avoid having to make a contribution,” Gardenhire told the group. “In the bottom ones, they have to stretch for gold because they can’t afford to contribute.”