With just 13% of credit unions offering their employees defined-benefit plans, is a shift underway that could potentially open up the window for employers to increase participation?
Pentegra Retirement Services, a White Plains, N.Y.-based provider of retirement plans, is optimistic that the time is ripe to reconsider defined-benefit plans. For one, historically low rates, which cause plan liabilities to increase every time they drop, appear to have nearly hit bottom and are poised to now begin rising as soon as the Federal Reserve suspends the accommodative support of growth through an expansionary monetary policy.
Defined-benefit plans were also hit hard by a 30-year bull market in bonds, the decade-long stagnation in the equity markets and the lack of viable options to extend duration for pension investment managers all exhibit signs of changing for the better, said Rich Rausser, senior vice president of client services at Pentegra.
Now, most of the trends may be coming to an end as credit unions and other employers do away with the freezes they put in place to reduce the costs to maintain the plans.
Pentegra said one key move came on July 6 when President Obama signed the Moving Ahead for Progress in the 21st Century Act that uses a higher liability interest rate in determining minimum required contributions and in turn, lowering employer contributions.
“As rates go down, the liabilities of these plans go up,” Rausser said. “Credit unions have to put more money into plans to get them going properly. What we’re saying is when interest rates go up, there’s a lot more relief in funding the plans.”
Much of the scale-back from employers came around the time the economy started to struggle in 2008, Pentegra said. Sponsors that were relying on 401(k) plans were providing less than adequate retirement benefits. As a result, employees grew more concerned about having enough saved to retire.
According to CUNA’s 2010-2011 benefits survey, nearly 40% of credit unions offered their employees 401(k) plans and 13% offered defined-benefit plans. Additional research cited by CUNA showed that 41% of employers had frozen their pension plans to new employees. Twenty-five percent frozen their plans entirely and did not have a strategy in place to terminate the plans. Another 20% put their plans on ice and were planning to terminate them once funding allowed them to do so.
Rausser said credit unions and other employers could see a return to that period between the late 1980s and 2001 when many defined-benefit plans were overfunded and employers did have to make contributions to them.
“This would be a very good thing,” he noted. “If you think about the best way to provide defined-benefit plans, truthfully, we believe in a combination of approaches. Retirement plans would become the core and the 401(k) is best used as an add-on benefit.”
There may also be additional cross-sell opportunities for credit unions. According to the Filene Research Institute in Madison, Wis., those with either a defined-benefit or defined-contribution plan are twice as likely to set up a living trust as those without.
Meanwhile, skeptics are not sure about whether defined-benefit plans are poised for a comeback. For some employers, they are still a financial burden to offer to their employees, according to Chicago-based ratings agency DBRS Inc., which reviewed 451 defined-benefit plans in North America in 2011 and found that more than two-thirds of them were significantly underfunded. The agency said there was a funding gap of $389 billion last year, the highest on record.
Still, Pentegra is convinced that if cost was not an issue, the plans would be a cornerstone of most employers’ retirement programs.
“The defined-benefit plan economics are shifting and will afford employers the opportunity for lower funding costs, thereby positioning [them] to once again become one of the most cost-effective methods of providing adequate retirement income,” Rausser said.