Retiring the pension plan: A PRT’s pivotal role in the evolution of retirement plans

The world of retirement benefits has witnessed a profound evolution – from the era of guaranteed lifetime pension plans to the modern 401(k) plans. As workforce needs and economies shift, retirement benefits have followed suit, with the government stepping in to add regulation and protection as it deems necessary. Through this transformation, pivotal tools – like Pension Risk Transfers (PRT) – have helped companies bridge the transition.

The importance of attracting & retaining employees

Retirement benefits have been an essential component of the modern workplace for over a century. In the late 1800s, the concept of pensions emerged as a means to attract and retain employees, offering them financial security in their golden years. The promise was simple: work hard and be rewarded with a pension that provides a steady income after retirement. The loyalty went both ways.

Though effective in its time, the traditional defined benefit (pension) model came with expenses, risks and responsibilities for employers.

The transition to defined contribution plans

In the 1980s, a new retirement benefits paradigm emerged with the introduction of defined contribution (DC) plans. Initially conceived as a supplement to traditional pensions and Social Security, DC plans offered several distinct advantages for both employers and employees.

Employers came to appreciate how DC plans removed the long-term financial obligation that came with traditional pension plans. These retirement accounts shifted the responsibility of managing retirement savings from the employer to the employee, allowing plan sponsors to focus on other areas of operations.

For employees, DC plans brought control and transparency to their retirement savings. They could make investment decisions, manage their accounts, and take their retirement plans with them when changing jobs, however with control comes market risk. This flexibility aligned with the evolving workforce, which saw an increase in job mobility and a decline in long-term loyalty to a single employer. While the portability of the DC plans was seen as a positive attribute, the lack of stability would soon become evident as returns on investments would not stand the test of market volatility, proving them to be insufficient as a reliable source for retirement income.

The current retirement landscape

Today, the employee retirement benefits landscape – and the workforce itself – stands in stark contrast to what it was a few decades ago. Traditional pensions, designed for long-term employment relationships, do not jive with the ever-changing dynamics of the job market and its transient workforce.

The DC plan has become the standard corporate retirement savings method for the average worker. Though not required to, employers are able to contribute to and match employee contributions to these plans, at a predefined percentage, adding a benefit to the employee experience.

Related: IBM to end 401(k) match, offer a ‘hybrid pension’: Will other employers follow suit?

The downside is, this benefit is at potential risk of loss when exposed to market volatility. While most trends are cyclical and there is talk of bringing back traditional pensions, for the most part they remain costly legacy obligations.

As businesses grapple with hiring challenges and ever-changing employment trends, the question comes up: How can they adapt their retirement benefits and free themselves of legacy obligations while providing retirement security for the next generation of workers? This is where companies have seen the benefits of PRT.

SECURE Act’s impact on retirement planning

The future of employee retirement benefits is brimming with newly-marketed options. In response to market volatility, low participation rates, and an overall lack of meaningful retirement savings, The SECURE Act, was introduced and signed into law in two parts. The main goal – through a variety of provisions – aims to incentivize businesses and employees to increase retirement savings and plan adoption through financial incentives and decreased regulation, provide wider access to retirement plans, and more clarity to participating employees.

SECURE 2.0 Act, which became law in 2023, expanded and modified many components of the first act. One key area addresses a continual challenge for those investing into a DC plan – not knowing exactly how much money they will have in monthly income when they retire. Employers can now add annuity options to their retirement plans, like the Qualified Longevity Annuity Contract (QLAC). By creating this new “savings bucket” with guaranteed income and requiring employers to add annuity options to their DC plans, SECURE 2.0 attempts to fill the gap left by traditional pensions and meet the needs of the current workforce. This addition can help transform an employee’s retirement savings into guaranteed income, providing employees with peace of mind similar to the benefits a traditional pension plan offers without the long-term financial obligation to the employer.

How PRT plays a role in retirement benefits

Pension Risk Transfer is the linchpin that connects the past, present, and future of retirement benefits. PRT is a strategic tool that allows companies to offload the burdensome legacy pension liabilities while adapting to the needs of the evolving workforce. By embracing PRT, employers can free themselves from costly obligations while protecting the retirement of their pensioners. Those preserved resources are in turn able to provide current and future employees with secured retirement benefits via a secured income alternative.

PRT can also play an important role in the current hiring crisis. Just as pensions were originally used as a recruitment and retention tool, so are 401(k)s and divesting former pensions frees up critical resources that can then be used to go a step further. For instance:

• Employers can redirect their resources from managing legacy pensions to attracting and retaining talent through more diverse, secured retirement options.
• Employers are able to implement programs to educate and help employees better manage their investments, pay off student loans and make retirement savings a priority.
• Employee morale and retention is improved through enhanced benefit programs.

While PRT is the path forward for companies with legacy pension plans, as with any shift, there are questions about the complexities of the process and crucial steps to take when considering a pension risk transfer. PRT experts partner with advisors and operate as advocates for employers to streamline the process so companies may reap the benefits sooner.

Employee retirement benefit plans are ever evolving, reflecting the changing dynamics of the modern workforce. PRT, with its ability to help companies transition from the past to the future, plays a pivotal role in this transformation.

Balancing choice & stability: The future of retirement plans

A pendulum swings in one direction and then another, but eventually it ends up in the middle. That is what we are seeing now in current regulations. While many will argue that we need fewer regulations in general, the SECURE Act (both 1.0 and 2.0) attempts to resolve the retirement income shortfall. The government is trying to address an otherwise impending crisis in our country by taking the favorable elements from DB and DC plans. The goal is to make it easier (and financially beneficial) for employers to provide retirement plans with guaranteed income options. This will allow more workers to take part in these plans and maintain employee control over their investments by providing clarity on what their retirement savings actually translates to in retirement, while at the same time providing new retirement investment vehicles.

The challenge comes in the lack of understanding what all of these new regulations mean – for employers and employees. While options and flexibility are positive things, the real-world implications of these provisions have yet to be realized. There isn’t a one-size-fits all solution. Each company, and each employee, has their own retirement planning goals. With an advocate, they are able to better educate themselves to find the right strategy for now, and for the future.

Geoff Dietrich is the Managing Director of DIETRICH, one of the largest independent companies that engineers insured funding solutions for traditional Defined Benefit (pension) plan terminations and pension risk transfers. He has been a partner and advocate to plan sponsors and their advisors for over 20 years. In addition, he manages ANNUA, a division of DIETRICH dedicated to developing and providing innovative group annuity funded retirement income solutions for 401(k) and other defined contribution retirement plans.