30 years too late and $20B short

[Arthur Kade]

Originally Posted by Kenny

(despite the fact he contiues to drive one of my firm's partners nuts)

Isn't it odd that something as almost self-evidently true as what Jeremy Gold says/writes would drive somebody in this industry nuts? Perhaps this is the kind of thing that feeds WWS's contempt.

[SirVLCIV]

Originally Posted by Kenny

This is about what I expected. The bolded sentence is the only thing that directly addresses my question, and is a certainly a reasonable arguement against the traditional DB benefit structure. My problem is that you keep saying DB plans suck and should die but your issue isn't really with DB plans, it is with the current structure (eg. legislation, accounting, general company approach, etc.). Some of that is changing and is where I think we should be focused to make sure it changes in a meaningful and useful way. And this isn't coming from someone who is trying to save his job (because while I enjoy the current security of my job I think I am more than capable enough to make a transition to plenty of other fields) but from someone actually intrested in the issues raised.

I don't know if you honestly don't see the difference, you think the only way to fix it is to destroy it first or something else. But, I think your passion could be useful in fueling the discussion, in the same way Jeremy Gold's passion for the accounting side continues to influence that discussion (despite the fact he contiues to drive one of my firm's partners nuts), as long as you stop simply bashing DB's and start actually discussing the real issues.

I think the current system of laws and regulations is really quite poor, and that the idea of the traditional DB (work for one company for life and retire after 35-40 years with 80% pay replacement) is not going to work in today's world of turnover, and I do agree that most (I can think of only one exception on the cases I've worked on) have woefully mismanaged their risk exposure over the years (not much you can do if a client ignores your advice).

However, I do think that DB plans have a very strong benefit to offer to employees, and if the problems could be fixed, and risk management could receive more focus, they could be viable in the modern world.

The status quo -will not work-. A maximum 3% match on 6% of income (that most employees don't maximize) is going to lead to catastrophe as people realize that $20,000 isn't going to last for 20 years of retirement.

One idea I've thought interesting is a DC plan with a DB floor. I don't think I've ever seen one IRL, but it satisfies the goals of employee and employer sharing the risk exposure.

[Arthur Kade]

Originally Posted by SirVLCIV

One idea I've thought interesting is a DC plan with a DB floor. I don't think I've ever seen one IRL, but it satisfies the goals of employee and employer sharing the risk exposure.

I've seen it in the small plan market, where the goal is to give the older owner/partners a DB benefit but younger employees a DC benefit. But I've never seen it in the large US market. I believe some Canadian universities use this model.

[Kenny]

Originally Posted by SirVLCIV

One idea I've thought interesting is a DC plan with a DB floor. I don't think I've ever seen one IRL, but it satisfies the goals of employee and employer sharing the risk exposure.

I know you probably don't want to do more reading since you are still studying for EA exams, but there are several papers on the FSA exams that discuss alternative approaches to traditional DB/DC plans. This being one approach.

Originally Posted by Arthur Kade

I've seen it in the small plan market, where the goal is to give the older owner/partners a DB benefit but younger employees a DC benefit. But I've never seen it in the large US market. I believe some Canadian universities use this model.

One of the biggest risks is that the DB floor is providing an implicit put option and encourages risk taking in the DC plan. There are approaches to limiting the risk taking available but then that limits the flexibility of investment options for the participant.

[Kenny]

Originally Posted by Arthur Kade

Isn't it odd that something as almost self-evidently true as what Jeremy Gold says/writes would drive somebody in this industry nuts? Perhaps this is the kind of thing that feeds WWS's contempt.

This is a bit off topic, but he is an actuarial traditionalist and from the public plan perspective there is no distinguishing between funding and accounting rules (since there are no minimum funding rules). I think some of his arguments make sense given the current political climate and what the traditional funding methods are supposed to represent, but think there needs to be a push to separate accounting from funding/budgeting in the public plan space. I think the FE and the traditional approaches have their place.

[SirVLCIV]

Originally Posted by Kenny

I know you probably don't want to do more reading since you are still studying for EA exams, but there are several papers on the FSA exams that discuss alternative approaches to traditional DB/DC plans. This being one approach.



One of the biggest risks is that the DB floor is providing an implicit put option and encourages risk taking in the DC plan. There are approaches to limiting the risk taking available but then that limits the flexibility of investment options for the participant.

I start taking FSA exams in November, so there you go

I think when I was introduced to the idea, the employer managed the DC pool to limit risk-taking.

[WWSituation]

Originally Posted by JMO

I don't think he has ever had anything positive to say about actuaries and pensions.

This was predictably ignorant from you.

[HatCapitol]

I've thought the same thing for awhile. I like the variable defined benefit with a floor design. The trustees would manage the assets, which would discourage the risk taking that Kenny is talking about. The variable benefit feature gives the plan some flexibility so they won't need to do anything dramatic to remedy underfunding if it occurs.

The floor encourages conservative investing on the part of the plan, which I think institutional investors like pension plans should practice more of. Since they represent so much of the available investment capital, their return chasing plays a big part in bubble creation.

The advantage to have VDB instead of straight DC is 1) trustee investment management and 2) guaranteed annuitization.

[WWSituation]

The DC plan with a floor exists. They are sold everyday out of many insurance companies - companies with the expertise, infrastructure, oversight, governance and capital to price and hedge the risk. These insurance companies, despite all of their resources allocated toward managing these risks, are in over their head and do do an iffy job with the risk management. Does anybody here think that a regular company sponsoring a DB plan is an a position to do anything other than bankrupt themselves by issuing irrevocable put options?

[HatCapitol]

Originally Posted by WWSituation

The DC plan with a floor exists. They are sold everyday out of many insurance companies - companies with the expertise, infrastructure, oversight, governance and capital to price and hedge the risk. These insurance companies, despite all of their resources allocated toward managing these risks, are in over their head and do do a great job with the risk management. Does anybody here think that a regular company sponsoring a DB plan is an a position to do anything other than bankrupt themselves by issuing irrevocable put options?

Yeah, we get it. You made a big commitment to change your career mid-life, and now you're devoted to your superiority complex over those of us still in the field. Get over yourself, we've heard your opinion already.