How to Reduce the Liability of Vested Pension Benefits

Stock market investment strategies provide a method by which businesses can reduce pension-system liabilities.

A liability-heavy retirement fund presents a business owner with a major long-term fiscal challenge. This is a significant problem for American business owners whose combined retirement funds have been found to be underfunded by more than $350 billion. Returning fiscal stability to the fund can be accomplished through the implementation of a set of processes and metrics designed to stop the bleeding and ween your company out of the business of managing a retirement fund.

Instructions

1. Implement a periodic review process for analyzing the investment strategies utilized by your fund's investment mangers. As part of this review process, develop a database of comparably-sized pension funds used by your business's peer groups and conduct an apples-to-apples comparison with your fund. Find the best practices used by these peer groups with a special focus on the funds which have historically performed well. If applicable, consider applying these practices to the investment strategies used by your fund.

   Conscientiously adhere to the periodic review process. It may be easy to give in to the temptation to occasionally bypass or suspend this process. This could lead to the failure to engage in the early adoption of cost-saving and high yielding best practices.

2. Establish a clear set of conservative metrics to govern the method by which cost-of-living allowances (colas) are issued to the retired plan participants. Resist the impulse to award unfunded colas. The implementation of unfunded colas can destroy the health of your fund. These guidelines should dictate that colas are awarded to plan participants only in the event that the overall fiscal health of the fund has substantially improved.

3. Enroll all new and prevested employees in a defined-contribution plan. A defined-contribution plan dictates that your business is only required to provide its retirement fund match to an employee owned retirement account such as a 401k. According to the United States Department of Labor Bureau of Economic Statistics, these 401k plans have grown to become the foremost means of retirement savings since their initial creation in the 1980s. The Bureau states that this has led employers to replace their legacy defined-contribution plans with defined-benefit plans.

   This reform will allow your business to get out of the retirement fund management business and allow employees to control their own retirement accounts. You may then limit entry into the fund, push the fund into frozen defined-benefit status and start to get a grasp on the actual liabilities without having to worry about extending those liabilities due to the inclusion of new plan participants.

Tips & Warnings

• Your ability to implement changes to the retirement fund will likely be governed by a series of laws and may also be subject to contractual obligations with the retirement system participants. Utilize the services of a legal professional to determine the applicable laws in your state and to renegotiate contractual terms as necessary.

References

• "Federal Reserve Bank of Dallas"; Is the Pension System a Liability?
• "Fence Viewer"; Maine GOP Bracing for a "Fiscal Tsunami"
• "United State Department of Labor"; Alternatives to Frozen Defined Benefit Pension Plans