Monday, April 2, 2018

The Financial Burden of Defined Benefit Plans

Defined benefit plans were the predominant retirement plan at the time the Employee Retirement Income Security Act (ERISA) was introduced in 1974. Many hospitals and other healthcare provider organizations in New York State had defined benefit pension plans. In a defined benefit plan, the total financial obligation falls strictly on the sponsor. The amount of benefit is stipulated and the funding of that benefit is the responsibility of the sponsor. As time went on, defined benefit plans became more onerous to maintain, more difficult to sponsor, and more expensive.

The Revenue Act of 1978 included a provision under which employees were not taxed on the portion of income they elect to receive as deferred compensation rather than as direct cash payments, thus making 401(k) plans possible. The emergence of defined contribution plans began a transition away from the plan sponsor offering and managing the retirement benefits, to participants having the ability to directly manage their retirement savings.

Many organizations froze their pension plans. Unfortunately, many of these organizations are still holding that pension risk. Because these defined benefit plans have not been formally terminated, they still require a significant financial commitment from the organization.

There are a number of strategies to assist organizations in reducing and ultimately eliminating the financial burden of defined benefit pension plans. Pension risk transfer and de-risking strategies are about permanently removing risk from an organization’s pension plan and the overall balance sheet. A successful de-risking strategy will outline ways to make a more efficient pension plan by moving liability that is not beneficial to the organization. Many organizations have already made the decision to terminate their pension plan, using either a hard-freeze or soft-freeze strategy. The goal is to realize a current cost savings and to create a formal plan for the eventual termination of the defined benefit plan.

To learn more about strategies to help organizations reduce and ultimately eliminate the financial burden of defined benefit pension plans, or to begin talking to a retirement plan advisor, please get in touch by email or by calling (855) 882-9177.