Two men looking and discussing something on a computer screen.

How does your defined benefit plan measure up?

Each defined benefit (DB) plan is unique. But the most successful plans share some common traits.

Take this quiz to see how your plan measures up.

Answer yes or no to the following 7 questions:

  1. A sound pension plan strategy aligns with business goals and clearly defines success. Does yours?
  2. Do you have—and follow—a documented process for managing your plan data?​
  3. Do you have a clear understanding and documentation of all plan fees, including all service providers and other fees such as PBGC premiums?
  4. Do you monitor and measure the effectiveness of how your plan assesses risk?
  5. Is there a funded status goal for your plan and do you measure progress towards achieving (or maintaining) this goal?
  6. Do you receive a quarterly review of how your pension plan is doing?
  7. Is your liability-driven investing (LDI) strategy meeting its objectives?

How does your pension plan compare?

If you answered “yes” to five or more questions, congratulations! Your DB plan appears to be on the right track.

If not, your plan might benefit from some extra help. Start by looking at how your plan measures up in these areas:

1. Your funded status and your goal

Your funded status goal will depend on a number of factors, including whether your plan is active or frozen. Therefore it’s important to review your DB plan’s funded status on an ongoing basis. Some service providers—including Principal—can set up triggers to let you know when your funded status reaches certain levels.

Sample glidepath for a hard-frozen defined benefit plan

With a dynamic asset allocation strategy, the pension plan allocates more assets to fixed investments as the plan's funded status improves.

A chart showing how a plan’s asset allocation is adjusted on a regular basis to increase fixed assets as the funded status improves.

2. Your glidepath

If you’re using dynamic asset allocation, set up triggers to monitor its progress and take action on a regular basis. Is your funded status improving? Are you locking in gains as they happen? If you’re not meeting your goals, talk with your advisor and actuary about whether adjustments are needed.

3. Your asset allocation and your liabilities

Not using dynamic asset allocation? Consider an asset liability modeling study to chart DB assets and liabilities and to help you evaluate the pros and cons of various asset allocation strategies. Inquire with your actuary about the benefits of asset liability modeling.

4. Your investment performance

The more closely your bond duration matches your liability duration, generally the less sensitive your plan’s funded status will be to interest rate fluctuations. As the name implies, liability-driven investments (LDI) are specifically suited to this task. But if LDI isn’t an option for your pension plan, you may want to look at your asset mix.

5. Your costs

Are your plan fees in line with the services you’re receiving? Have you considered strategies to reduce PBGC premiums? Some costs and fees are fixed, but others fluctuate. Discuss with your advisor and actuary during regular pension plan reviews.

6. Your plan design

During regular plan reviews, check that your plan design still meets your organization’s needs. Ask the following questions:

  • What are your goals for the plan?
  • Are you providing an adequate amount of benefits for each employee (taking into account any other retirement plans you may offer)?
  • Is the plan costing you more than expected?
  • Are you taking on more liability than intended?

How you answer may determine if you want or need to change your benefit formula, your asset allocation, or your plan design by: converting to a cash balance plan, soft freezing the plan or hard freezing the plan with the intention to terminate it.

7. Analyze the current environment

Your plan can be impacted by countless outside forces. It’s wise to keep an eye on three major risks that can impact both the cost of administering your plan and its ability to meet liabilities:

  • Changing mortality assumptions: As life expectancies increase, so can pension obligations and PBGC premiums.
  • PBGC premiums: Premiums have been increasing since 2015 and are scheduled to do so through 2019.
  • Interest rate changes: While rising interest rates can lower pension obligations, the reverse is also true. A 1% change can impact plan liabilities by as much as 10 - 15%.

We can help

No single strategy is right for every organization. We can help you and your financial professional objectively evaluate your options, make an educated decision, and create tangible action steps you can use to help reach for your unique goals. Give us a call at 800-952-3343, ext. 22681 or contact your advisor to get started.

The subject matter in this communication is educational only and provided with the understanding that Principal® is not rendering legal, accounting, investment advice or tax advice. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, investment or accounting obligations and requirements.

Insurance products and plan administrative services provided through Principal Life Insurance Co., a member of the Principal Financial Group®, Des Moines, Iowa 50392. 

Principal, Principal and symbol design and Principal Financial Group are trademarks and service marks of Principal Financial Services, Inc., a member of the Principal Financial Group.