Special Report: The Risk Factor in Pension Transfers

Plans often do piecemeal deals, to reduce the chances of everything going down the tubes.


A corporate pension risk transfer (PRT) in an innately risky undertaking. First are the risks of sitting tight and not doing a PRT. Such as: Will low interest rates continue and make the effort to meet liabilities harder? What if the stock market craters and stays low for a prolonged period? Can a plan meet its obligations in coming decades if the number of beneficiaries is unclear?

But then there are the fresh risks of taking the leap and making a transfer. Like: Is bridging the gap to full funding, which an insurer requires to do a deal, too grave a sacrifice? Diverting precious company capital to boost the funding level could deprive the business of the fuel it needs to grow.

Questions along these lines occupy plan sponsors as they contemplate removing liabilities that can thwart them over the long term. No wonder doing a PRT is a fraught experience. “It’s time-consuming and expensive,” said Anthony Parish, CIO at Alphastar Capital Management, a PRT adviser.

The process of finding an insurance company to take over a defined benefit (DB) plan’s liabilities—and the assets that are focused on paying them over time—involves bidding by insurers for the job. If little chance exists that a plan can achieve 100% funding, insurers will take a pass.

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That’s why plans often don’t tend to unload all obligations all at once. The standard progression is to first close a plan to new hires and to freeze the ability of existing participants to accrue more pension credits—based on pay and years of service—for their future time at the company.

This gives sponsors a better handle on the size of their liabilities. One more way to lighten a sponsor’s load is to offer participants a lump sum, which they take in exchange for forfeiting all rights to pension payments.

Then we get to the PRT. From there, the common practice is to say goodbye to groups of beneficiaries bit by bit. Delivering an entire plan to an insurer—and thus terminating all future obligations—is an enormously complicated task and can take anywhere from 12 to 18 months to perform.

The piecemeal approach is quicker and easier, although certainly a hassle, too. Often the first to be loaded on the PRT conveyor belt are those with the smallest benefits. Sponsors “might choose everyone who gets below $500 a month, because they are expensive to carry,” noted Ari Jacobs, global retirement solutions leader at Aon, which advises plan sponsors.

The Pension Benefit Guaranty Corporation (PBGC), a federal agency that oversees DB plans for 34 million US workers, charges the same amount in premiums to insure a plan for a small benefit as it does for a large payout, Jacobs pointed out.

The easiest group to transfer? Retirees who are currently drawing pension payments, said Mark Paracer, research outfit LIMRA’s assistant research director. Insurers “know what benefits they will be receiving,” as opposed to existing employees whose payments might be tougher to quantify, he explained.

Insurers like to say, with some justification, that they are simply better at administering plans. In the case of PRTs, that means large group annuities. After all, the carriers have offered annuities for many, many years, and know best how to judge beneficiaries in actuarial terms. Also, they have better scale when investing the plan assets. Insurers, said Alexandra Hyten, head of Prudential Financial’s PRT effort, “are more efficient holders” of plan assets and liabilities.

One bonus for insurers: They don’t need to pay the increasingly higher premiums that corporate plans are charged by the PBGC. The premiums now sits at $86 per participant, which is quite an increase from the $35 the agency charged 10 years before.

Burdens like that are why a good number of sponsors happily part company with their DB plans.

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Fidelity 401(k) Plan Balances Rise to New High in Q1

Despite economic fallout from the pandemic, defined contribution plan balances remain strong.


The average 401(k) retirement account balance among Fidelity Investment clients rose 2% in the first quarter of 2021 from the previous quarter, and 36% from the year-ago period to a new high of $123,900, according to the firm’s quarterly analysis of 401(k) plans.  

“Data remained relatively steady, with participants continuing to improve their savings behaviors and increase their balances, while workers slightly reduced their loans and withdrawals,” Fidelity said in its report.

The report also found that among those who have been saving for at least 15 years, the average balance rose to $490,100, from $232,200 five years earlier, and $99,500 in 2011.

The company also said that due to 98% of employers offering target-date funds (TDFs), and 92% using them as the default investment option, “employee diversification has improved greatly over the last 10 years.”

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 It also noted that Baby Boomers are the most likely to invest too aggressively, putting them at risk as they near retirement, while 69% of Millennials are 100% invested in a target-date fund, thanks in large part to automatic enrollment.

The analysis also found that large plans, defined as those with at least $500 million in defined contribution (DC) assets, are offering participants significantly fewer investment options than they did a decade ago. According to Fidelity, those plans now offer an average of 15.4 investment options, down from an average of 25.5 investment options in 2011.

Surprisingly, the analysis found that despite many workers still facing financial challenges related to the COVID-19 pandemic, loans and withdrawals declined slightly during the first quarter of the year.

The percentage of workers with an outstanding 401(k) loan dropped to 17.5% down from 19.7% during the first quarter last year, and the percentage of workers who made a withdrawal from their 401(k), including hardship withdrawals, fell sharply too during the quarter to 2.4%, down from 6.1% in the fourth quarter of last year, and 3% during the year-ago quarter.

The report also found that the popularity of Roth 401(k)s has risen sharply in the past five years, during which time the amount of plans offering the Roth option has increased 32%. The option is most popular among younger investors, as Fidelity said Millennials are the most likely to contribute to a Roth 401(k), increasing to 16% from 10% in the last 10 years.

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