5 Things you should know as a Sponsor of a Defined Benefit Plan

- by Pat Byrnes

Sometimes in life you learn the right things to do by observing when something went terribly wrong. On the front page of the Los Angeles Times business section on March 16, 2010 an article entitled “For CalSTRS, a bet that failed“ by Marc Lifsher is a stunning example of what not do to do with a defined benefit plan. That’s the government sector which is very different from the private sector.

Defined benefit plans are marvelous tools to solve…well, retirement planning problems. They can be very flexible and very rewarding too if you pay attention to a few things.

Here are my thoughts on private sector defined benefit plans:

1. Confront the brutal facts. When your business or profession is going through turbulent times, pay attention to your plan. Ignoring never helps. Surprises are worse if you wait.

2. Deal with a pro-active actuarial firm like ACI. The pro-active piece is very important. We contacted all our defined benefit clients at this time last year and discussed with them the thought of freezing their DB plans before anyone incurred 1,000 hours in the 2009 plan year. This needed to be communicated and executed by about mid May 2009, depending on the number of participants. Most decided to do so. They will be able to fund out their asset losses before they unfreeze those plans.

3. Plan Design matters. Your goals for the plan and the flexibility needed may be significantly different than your current document specifications. The Pension Protection of 2006 changed a lot…and it’s not all bad. Deductions have increased significantly. Baby Boomer entrepreneurs and professional entities have embraced cash balance plans in conjunction with defined contribution plans.

4. Coordinate the plan design and funding rules with the investment of the assets. Pay attention to how the investment of the assets compares to the plans underlying assumptions. Make a conscious choice on the investment decisions. If the underlying plan interest rates are in the 5%-6% level and you shoot for a 9%-10% growth rate, know that you are taking a risk.

5. Be willing to think differently about your plan and the funding of your own retirement.
We are very skilled with these plans. We would be happy to do a quick review for you if you provide us with a signed copy of your plan document and latest actuarial report. Please call me at (310) 212-2612 or email me at: pat.byrnes@acibenefits.com.