Defined benefit providers and plan sponsors continue to evaluate strategies for improving overall outcomes.
Long has the death knell been sounded for the traditional defined benefit (DB) pension plan. However, among plan providers that participated in both the 2015 and 2017 PLANSPONSOR Defined Benefit Administration surveys (PLANSPONSOR conducts the survey biennially) plan counts are up substantially—by 22.0%. Considering the health of the pension risk-transfer market and the reported decline of these plans, one wonders where the growth originates.
“If you asked the man on the street, he would say that no new employees have pension plans, but that’s not true for large employers,” says Stewart Lawrence, senior vice president and national retirement practice leader at The Segal Group Inc. in New York City. “Of the Fortune 100, a quarter of them still have pension plans that cover new employees, which is counter-intuitive,” he says. “Fully a quarter of large employers have open plans, and nearly all of them are hybrid plans or cash balance plans.”
Interest in such plans ticked up after the Pension Protection Act of 2006 (PPA) gave cash balance plans the opportunity to tie interest credits with market returns. Cash balance plans will become even more popular as plan sponsors question whether defined contribution (DC) plans can facilitate retirement income like defined benefit plans do, according to industry experts. With that plan option, sponsors can provide a pension but without the same volatility they experience in traditional pension plans, and participants will be able to track the account’s value just like in DC plans.
In fact, cash balance plans, specifically, saw a 78.1% increase from 2015 to 2017 among providers participating in both years of the Defined Benefit Administration Survey. They now account for more than a fifth (20.7%) of all defined benefit plans.
“But we’re not seeing the midsize or large employers start cash balance plans,” Lawrence continues. “Instead, the growth is coming from small plans. Small professional service organizations use cash balance plans as tax shelters, not as retirement plans. It’s a legal way for the doctor and a few office workers or dentist or architect to use them, and that’s the growth.”
Chris Mason, senior analyst of institutional asset management at Cerulli Associates in Boston, says, “Cash balance plans represent a type of pension de-risking that traditional DB plan sponsors have increasingly explored in recent years. These plans possess characteristics of both defined benefit and defined contribution and likely will continue to increase in popularity as the costs of maintaining a traditional defined benefit plan continue to rise.”
Selecting a DB Plan Provider
When selecting a provider for defined benefit plan administration, Timothy Ryor, senior vice president and practice leader, actuarial services, at Hooker & Holcombe in West Hartford, Connecticut, suggests plan sponsors should “identify what you want and the firm that can help
you achieve that. What is the plan sponsor looking to provide for participants?”
Topping the list, experts agree, should be depth of knowledge—a provider that has a track record of expertise with the plan sponsor’s type of defined benefit plan.
In addition, sponsors should check providers’ technology and verify which providers are spending time updating their administrative platforms; they should also learn when the providers developed their software and how easy it is to enhance. Importantly, experts say, sponsors should question the type of fees a defined benefit provider charges.
Providers are continuing their push to make servicing this industry more efficient; 65% report having made a “major update” to their core administrative systems in the past two years. For example, this year, at least 45% of all participant interactions have occurred online vs. only 37%
in 2015, according to the survey results. As in the DC space, participant communications and information continue to be a focus: 79% of providers report having made a “major update” to
their plan participant website in the past two years.
Lawrence says that voice interactive systems have been a game-changer for participant communications. For instance, he says, “The technology and the robustness of the voice interactive systems is getting better and better. The voice system narrows requests by asking pointed programmed questions. In the end, you can get what you want without speaking to anyone.”
—Judy Faust Hartnett and Rebecca Moore