The ERISA consultants at the Columbia Management Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. A recent call with a financial advisor in Michigan is representative of a question we commonly receive related to de-risking of pension plans. The advisor asked:
“At least weekly, I see a headline about pension plan ‘de-risking.’ I generally don’t deal directly with pension plans. Can pension de-risking impact my practice and, if so, what are its potential effects?”
Highlights of Discussion
• Pension plan de-risking can have a material impact on your practice. In a nutshell, pension de-risking consists of a series of forward-thinking plan design strategies engineered to help reduce volatility with respect to a business’s DB plan obligations and corporate balance sheet.
• According to a 2013 Towers Watson survey of DB plan sponsors, 75% of respondents have implemented, are planning to, or are considering developing a formal de-risking plan for their DB plans. They cited several factors that led them to develop a formal de-risking plan. The factor cited most often was the impact of the DB plan on financial statements (69%), followed by the impact of the DB plan on company cash flow (58%) and the general cost of the plan (41%).
• Pension plan sponsors must meet funding requirements and any shortfalls are reflected on their corporate balance sheets. They are under tremendous pressure to reduce the financial liabilities of their DB plans. Consequently, more and more are turning to de-risking strategies. The following graphic illustrates the continuum of de-risking strategies that companies have begun adopting.
• Offering lump sum payments is one of the most attractive of the de-risking strategies. The Towers Watson survey found that 39% of DB plan sponsors added lump sum options to their plans in 2012 or 2013, and an additional 28% are planning to offer lump-sum payments in 2014 or 2015.
• A lump sum payment option can put a great deal of money in motion. For example, Fannie Mae and Freddie Mac terminated their DB plans as of Dec. 31, 2013, and offered lump sums as a payout option in addition to annuities. One result of the lump sum opportunity was to make $2 billion potentially eligible as rollovers to IRAs or other eligible retirement plans.
• Another effect of pension de-risking is to shift the focus of future retirement saving to DC plans and personal retirement savings arrangements like IRAs. Therefore, plan participants may be in need of additional retirement planning guidance.
Conclusion
The financial climate is right for the pension plan de-risking trend to accelerate. Whether a financial advisor works directly with DB plans or not, he or she can realize opportunities to speak to clients about the effects of pension de-risking.
The Columbia Management Retirement Learning Center Resource Desk is staffed by the Retirement Learning Center, LLC, a third-party industry consultant that is not affiliated with Columbia Management. For informational purposes only. Please consult a tax advisor or attorney for specific tax or legal needs. © 2014 Columbia Management Investment Advisers, LLC. Used with permission.
