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Managing Funded Status Volatility in Defined Benefit Plans


Since 2008, the U.S. has experienced a period of historically low interest rates. While a low-rate environment can be a boon to consumers looking to finance new cars or homes, or businesses borrowing to expand, for many ERISA-governed defined benefit (DB) plans it's problematic - and can become increasingly so the longer low rates prevail.[1]

Understanding how interest rates are used to calculate a plan's funded status can help plan sponsors evaluate whether their plan's current investment strategy is most appropriate for the plan, or whether another may be a better fit. In this paper we discuss how interest rates (high-quality corporate bond rates) impact funding levels and explain how Liability-Driven Investing (LDI) works.

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Unless otherwise noted, throughout this paper "plan" and "DB plan" (singular or plural) refer to defined benefit plans covered by ERISA (the Employee Retirement Income Security Act of 1974).


Principal Life is not a fiduciary in the broader context of operating any plan.

While this communication may be used to promote or market a transaction or idea that is discussed in the publication, it is intended to provide general information about the subject matter covered and is provided with the understanding that none of the member companies of The Principal is rendering legal, accounting, or tax advice. It is not a marketed opinion and may not be used to avoid penalties under the Internal Revenue Code. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements.

Insurance products, plan administrative services, and separate accounts which are available through a group annuity contract, are provided by Principal Life Insurance Company, a member of the Principal Financial Group (The Principal®), Des Moines, IA 50392.

Investment advisory services offered by the affiliates and specialized investment groups of Principal Global Investors, the asset management arm of the Principal Financial Group.

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