Retirement program redesign? 4 pillars of a modern plan
The extent to which an employer’s current plan meets these objectives dictates whether it might be time to consider a new more modern plan design.
1. Improve retirement outcomes
A successful pension plan needs to invest and accumulate assets effectively during working years, and then convert them efficiently into guaranteed lifetime income. Traditional defined benefit (DB) plans and cash balance (CB) plans lend themselves to overly conservative investment strategies, increasing their cost, while defined contribution (DC) plans are ineffective at providing lifetime income, relying either on expensive insured annuities or on overpriced and complicated income products.
Modern plan designs invest assets competitively to maximize the growth of assets while balancing risk, and then convert them into lifetime retirement income inside the pension plan, taking advantage of longevity risk pooling opportunities in the plan, and avoiding underwriting and other external plan expenses and overhead.
The goal is not to spend more money, but rather to create the most retirement value for employees, based on the money spent.
2. Increase employee appreciation
A successful pension plan must be easily understood by employees who appreciate the value it provides them. Traditional DB plans struggle with this topic, since most employees undervalue the expensive benefits they provide. By contrast, DC plans do a good job of communicating the value the employer provides; however, as employees are starting to understand the importance of guaranteed lifetime income, they begin to question whether the DC plans really do provide what they need for retirement.
A modern plan design would be transparent in the value being provided to employees while ensuring that employees understand how the plan will support them and their families in future.
3. Reduce turnover and support HR priorities
Workforce management, attraction and retention of employees are increasingly priorities for HR that require every tool in the toolbox. Traditional DB pension plans were an effective, albeit very expensive, retention tool, providing substantially richer benefits to older employees, at the expense of offering little value to employees who did not expect to remain employed until retirement, which essentially eliminated their value in employee attraction. DC plans overcorrected, offering very similar benefits to older and younger employees, eliminating workforce management options for employers.
A modern pension plan would serve to attract employees, incent long service, and to facilitate orderly retirement at the appropriate time in employees’ careers, supporting transition and upward mobility at a reasonable cost – all key HR objectives.
4. Manage employer risk
While pension plans come at a cost, employers must be able to reasonably predict those costs and the risks associated with them. The costs of funding and accounting for traditional DB plans are notoriously volatile, and subject to wild fluctuations based on economic and demographic factors beyond the employer’s control. The response to these challenges was the broad adoption of DC plans, which provide employer cost certainty but at the expense of losing many of the other benefits that pension plans could provide.
A modern pension plan must effectively manage the financial obligations through a combination of design and investment strategies, without giving up on all the other benefits that the plans could provide employers and employees.
A plan that has the cost characteristics of a DC plan while retaining many of the other strengths outlined above, would truly be a modern plan for the future. This goal is achievable today.
Idan Shlesinger is Partner and Retirement Solutions Practice Leader at October Three Consulting, LLC.