Invest or Contribute to Solve
a Retirement Funding Shortfall?
Marty Menin (left)
and Russ Proctor
For illustrative purposes only.
Many defined benefit (DB) plans were closed to new entrants
and/or frozen after the market crash in 2001 and the financial
crisis in 2008. Due to many reports of the demise of DB plans,
advisers might think all these plans would be terminated by
now. However, many are still in existence and are—despite
significant market returns during the past few years—still
underfunded. As plan sponsors struggle with the volatility
of their plan’s funded status and the increasing expenses
required to maintain them, they are looking for assistance.
PLANADVISER spoke with Russ Proctor and Marty Menin,
directors with Pacific Life in their Retirement Solutions Division,
about the challenges defined benefit clients face, how some
of them mirror challenges faced by defined contribution (DC)
plans, and the solutions retirement plan advisers can consider
to help resolve these issues.
PLANADVISER: First, why is funded status volatility
a problem for frozen defined benefit [DB] plans?
Marty Menin: Volatility is somewhat accepted for an
ongoing plan that is still accruing benefits for the company’s
employees. However, once the plan is frozen and employees
are not earning any additional benefit, the volatility is just
a financial irritation to the company. Add to that volatility
the increasing administrative expenses, including Pension
Benefit Guaranty Corporation [PBGC] premiums, and now
it’s more costly than ever to maintain these frozen DB plans.
PA: Many companies have not fully funded their plans
hoping to earn their way out of this underfunding
problem. Advisers know that doesn’t work when saving
in your 401(k) plan, but how has that worked on the DB
Russ Proctor: Yes, that’s a good comparison. Just hoping
your 401(k) plan earns its way into the retirement income that
you need is not going to work, without putting some money
in, and for the DB plan, this really has not worked out very
At the end of 2008, the average large plan was 78.3%
funded. 1 The total funding shortfall for all of these plans was
about $250 billion. At that time, the S&P 500® index was at
826 and the 10-year Treasury was 2.25%.
Move forward to May 31, 2017, the 10-year Treasury
is about the same at 2.21% and the S&P 500® index has
increased almost 200% to 2,412. On top of that, the Milliman
100 companies have contributed more than $385 billion to
these pension plans during this time, more than the underfunding that was there back in 2008.
One would think the plans would be in a surplus position
with that level of contributions and the approximate annual
12.8% market returns. Sadly, the funded status is still well
short of 100% and stands at only 83.8%, an increase of only
5.5% during that time frame. 2
PA: How is it possible that these plans are still that far
underfunded given the increase in equities and that level
Marty: Not all of those Milliman 100 plans are closed and
frozen. Thus, some of those contributions are being used to
fund the increases in the accrued benefits. Also, not all of the
assets are invested in equities. Most sponsors would find it
too risky to be 100% in equities in their pension plan similar
to how an individual approaching retirement might not want
to be 100% in equities. Therefore, not all of their assets are
increasing at that historical rate of 12.8% per year. Other
assets may be invested in a fixed income or traditional “Best
Efforts” LDI [liability-driven investment] strategy designed
RESULTS SINCE 2008