In today’s uncertain market environment, many plan sponsors are asking the same questions about risk, timing, and long-term strategy for their defined benefit (DB) plans. Get clear and practical insights to five of the top questions to help navigate key decisions with greater confidence.
Managing a defined benefit (DB) plan today means making decisions in a constantly shifting landscape—interest rate uncertainty, market volatility, and evolving plan dynamics all play a role. It’s no surprise that many plan sponsors are reevaluating their strategies and looking for clarity on how and when to take action. Whether thinking about de-risking, adjusting asset allocation, or exploring provider consolidation, the questions being asked are shared by many.
Here we explore five of the most pressing questions sponsors are facing right now.
Managing pension liabilities is typically a long-term journey, one that’s significantly influenced by interest rates. Today’s interest rate environment is shifting and unpredictable, and that can create short-term volatility in funded status.
Think of this like steering a large ship through changing seas:
Short term—the seas are rough. Inflation pressures and economic uncertainty are unpredictably pushing liabilities up and down. Just as a captain adjusts to maintain course, so should plan sponsors focus on risk mitigation during this period of volatility.
Long-term—economists expect the waters to settle. Interest rates may not return to historic lows, but they could normalize into more stable territory. When that happens, pension sponsors should be ready, as they might have more predictability in both funding and investment strategies.
Key takeaway—don’t make drastic changes based on every wave. Instead, plan sponsors should focus on maintaining a resilient, long-term strategy. One that uses tools like liability-driven investing (LDI) and glide paths to manage short-term volatility while keeping the bigger picture in view.
For many plan sponsors, the answer is yes, and it’s worth beginning the process now. More plan sponsors are taking steps toward full funding and annuitization, especially in the current market. But what many don’t realize is that even if you’re ready to exit the plan, you can’t annuitize tomorrow. It typically takes about 12 months to purchase annuities, notify regulators and participants, gather participant elections, and fully liquidate the plan.
The decision to annuitize involves multiple factors other than funded status. It should also reflect:
- Participant demographics
- Company's risk tolerance
- Administrative costs
- Available insurance pricing
- Overall corporate strategy
Think of annuitization like selling a home in a hot market, multiple factors should be considered beyond the current price. Careful preparation, timing, and coordination are important to help secure the best outcome. If the DB plan is nearing the finish line, getting an early start can provide more control, added clarity, and help ensure you don’t miss a favorable window.
Traditionally, plans waited until they were 80-90% funded to begin de-risking. But today, that approach is shifting—and for good reason.
De-risking shouldn’t be a late-game tactic. It’s typically most effective when implemented as a dynamic strategy that begins early and adjusts based on both funded status and market conditions. Think of it like climbing a mountain, you don't wait until you're near the summit to put on safety gear. Many sponsors have adopted glide paths that initiate de-risking at 70-75% funded levels, then gradually increase the pace as funded status improves. This not only reduces exposure to market shocks but also helps preserve gains over time. By incorporating risk management earlier into the investment approach, the de-risking path may become more stable.
When the market rebounds, it can be tempting to make changes to the plan’s asset allocation. However, effective risk management isn’t about trying to time the market, it’s about planning. Think about it like buying property insurance, you don't wait for a hurricane to buy coverage. The same principle applies here. Rather than trying to time the market, plan sponsors should focus on risk management.
Current conditions present an opportunity to review the LDI strategy and potentially lock in gains. Keep in mind that any decision should align with the long-term funding strategy and risk tolerance.
Consolidation can be a powerful way to reduce friction and manage risk. When all services are integrated with one provider, plan sponsors may gain a clearer view of what’s happening with the plan.
- Administrative efficiency. A single point of contact helps: Streamline vendor coordination, standardize processes, eliminate different reporting systems, and simplify audits and compliance reviews.
- Data integrity. When data flows through one system instead of many, there’s less risk of errors, delays, or miscommunication. Typically, issues can be detected and corrected faster.
- Cost control. Consolidation helps eliminate redundancies, unlocks pricing efficiencies, and allows for greater negotiating leverage across services.
- Streamlined governance and oversight. Plan sponsors may benefit from more unified oversight, consistent investment policy enforcement, and simplified fiduciary management.
- Aligned investment strategy. A holistic view across plan assets could help improve liability matching, enhance rebalancing, and support integrated risk analysis.
- Enhanced risk monitoring. With consolidated data and systems, plan sponsors can get real-time insights, consistent risk metrics, and integrated tools for stress testing and scenario planning.
What’s next?
Every defined benefit plan is unique, but the questions sponsors are asking today often point to the same underlying need: clarity, control, and confidence in an evolving risk environment. Whether you’re considering annuitization, reevaluating your asset allocation, or looking to reduce administrative complexity, the first step is starting the conversation. A thoughtful strategy can help preserve funding gains, reduce volatility, and position your plan for long-term success.
Talk to a trusted financial professional
It’s important to work with a qualified consultant who can help navigate the complexities of a derisking strategy. Reach out to your Principal® representative if you’re considering the next step in derisking your DB plan or want to understand your options. We’re here to help support your plan’s long-term financial health.
