PLANADVISER - September/October 2018 - 51

The Adviser's Role
Both Devlin and David Hinderstein, president of Strategic
Retirement Group Inc., in White Plains, New York, question
whether advisers with DB plan clients are serving them well
if they neglect to discuss PRT with them. According to Hinderstein,
with pension risk transfers, an adviser would play two
different parts: the quarterback, to help build a strategy and
to manage the de-risking of the plan, and investment adviser,
to ensure that assets and liabilities still match.
" Typical DB plans use an actuary, custodian and investment
adviser, " Hinderstein says. " The plan sponsor doesn't
have anyone to coordinate [PRT] efforts. As consultants, we
coordinate all efforts-benchmarking insurance providers,
[explaining] assets and liabilities, developing goals and
objectives to de-risk, and facilitating actions. " He adds that
advisers do not need to be investment advisers; they can
focus on helping plan sponsors build a de-risking strategy.
Daniel R. Casella, executive director of consulting, also
at Strategic Retirement Group, says de-risking strategies
are not limited to just frozen plans wanting to terminate.
They also help plans that are open and active make liabilities
smaller.
Hinderstein notes that vetting annuity providers is a
fiduciary duty. In 2007, the Department of Labor (DOL)
issued two rules under the Pension Protection Act (PPA)
relating to choosing an annuity provider for distributions
from DB and defined contribution (DC) plans. One was an
interim final rule amending Interpretative Bulletin (IB) 95-1
to limit the bulletin's application to only the selection of
annuity providers for distributions from DB plans.
Hinderstein says helping DB plan sponsors with PRT is
like helping them manage their balance sheet, where the
plan is purely a line item-an adviser needs the sophistication
to understand balance sheet management in order
to help sponsors with PRT. He would recommend that any
adviser spend time with various providers that specialize in
DB plans, or else partner with an adviser who does.
Hinderstein also says analyzing participant demographics
is important to help sponsors decide whether to do
lump sum distributions, an annuity transfer or both. How
many retirees already receive monthly payments? How
many terminated, vested vs. active participants are there?
This also helps with building a strategy for when to offer a
lump sum or purchase an annuity.
According to Devlin, the cost of a PRT is something
else advisers need to go over with DB plan clients. As a
simple example, he says, the present value of lump-sum
payments may be $50,000, but purchasing an annuity to
cover that liability may cost $65,000. " There is a spread
in what it costs to offer a lump sum and how an annuity
provider prices an annuity, " he says. Plan sponsors need to
consider what they can afford.
Investment Strategy
When pension plan sponsors implement any kind of PRT,
Devlin says, it usually requires restructuring investments.
Advisers can help plan sponsors with reallocation. " There
should be a good, thorough review, " he says. " For example,
the risk transfer could have altered the duration of the
plan. If a plan sponsor is using a liability-driven investing
[LDI] strategy, where they are in their glide path may have
changed, so they may want to change the glide path. "
When determining how much a plan's liability will grow
year over year, the sponsor must consider PBGC holding
costs, and trustee and custodian costs. " Now the plan needs
a 6% return just to break even. An LDI portfolio doesn't
provide much investment return; it drags down on equity. In
a bad market, a 4% loss and liability growth of 4% increases
a plan's liability by 8%, " Devlin points out.
Casella says plan sponsors looking to get returns by
increasing equity exposure can save on cost by increasing
their use of indexing and by reducing the volatility of
liability going toward a fixed-income portfolio.
He also notes there are four different measures to calculate
funded liability, and many plan sponsors are unaware
of where they fall in each. Such discussions give sponsors
confidence that there is a strategy.
The Value Advisers Add
From a human resources (HR) perspective, helping a
sponsor slash, from 1,000 to 800, the number of participants
it is responsible for eliminates required mailings,
funding notices and other administrative costs, Devlin
says. " It's hard to put a number on [it], but it helps plan
sponsors save money. " If, for example, a PRT reduces $20
million on the balance sheet to $15 million, it has eliminated
$5 million of exposure.
According to Casella, advising about PRT is especially
helpful to sponsors of frozen plans. These sponsors still
have an obligation to pay benefits to participants and their
beneficiaries; they are also paying actuaries, custodians
and the PBGC. When such expense is involved, " it is not
financially sound to keep the plan, " he says.
Devlin concludes, " It's not to say that every DB plan
sponsor should be implementing PRTs, but an adviser should
make sure they review and explore the idea. For some
companies, it's a no-brainer. For some, it's a good business
decision, and, for others, it could confirm that they should
keep doing what they're doing. " -Rebecca Moore
KEY TAKEAWAYS
* With the pension risk transfer market expected to exceed
$23 billion this year, offering this service to DB clients is
an option advisers should consider.
* To conduct a PRT, plan sponsors have two options: offer
lump-sum benefit payments or buy a group annuity to
cover liabilities.
* With PRTs, the adviser plays two roles: quarterback, to
help build a strategy and manage the de-risking of the
plan, and investment adviser, to ensure that assets and
liabilities still match.
planadviser.com September-October 2018 | 51
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