PLANSPONSOR - February/March 2018 - 24

25 YEARS OF RETIREMENT PLANS
Late 2000s and Early 2010s
The DB-ification of DC Plans
SINCE passage of the Pension Protection
Act, the industry has been coming to
terms with the reality that " the age of
empowerment " for DC plans participants
did not produce the anticipated investing,
and savings, boom. A participant can now
be automatically enrolled at an appropriate
savings rate, have that progressively
increased for him, and be invested
in a portfolio that offers a professionally
managed asset allocation.
Defined contribution plans have
gradually been growing to resemble
defined benefit plans-in important
ways. In October 2014, the Treasury
Department and the IRS take another
step forward when they issue guidance
designed to address lifetime-income needs
by expanding use of income annuities in
401(k) plans. Notice 2014-66 " makes clear
that plan sponsors can include deferred
income annuities in target-date funds
[TDFs] used as a default investment, in a
manner that complies with plan qualification
rules, " a Treasury news release says.
Part of the DB-ification of DC plans
has been plan sponsors' growing understanding
that automated plan design can
help many more employees get on the
right track with retirement savings. The
2014 PLANSPONSOR DC Survey: Plan
Benchmarking will find that 40% of plans
surveyed use automatic enrollment, and
25.5% utilize automatic contribution escalation.
Sponsors also increasingly see the
wisdom of participant assets being put in
professionally managed portfolios.
These trends are helping to DB-ify the
accumulation phase. The decumulation
phase, however, is getting far less attention.
After Washington issues its 2014
guidance, few sponsors will respond by
offering retirement-income products in
their plans. The 2014 DC Survey will find
that 9.1% of plans offer in-plan retirementincome
products that guarantee monthly
income. Among sponsors surveyed, 8.2%
offer in-plan products not providing guarantees-such
as managed payout funds-
while 4% offer in-plan products guaranteeing
a base benefit that could increase.
With the 2014 guidance and an
accompanying letter, the Department of
Labor explicitly confirms that target-date
funds used as default investments could
include annuities among their fixedincome
investments. It also discusses
how sponsors could satisfy fiduciary
standards by appointing an investment
manager that selects the annuity contracts
and provider.
" As [Baby] Boomers approach retirement
and life expectancies increase,
income annuities can be an important
planning tool for a secure retirement, " a
Treasury official says. " By encouraging
2011
DB Funding Requirements,
PBGC Premiums and Pension Risk Transfer
WHEN Prudential Retirement announces
in May that it has completed the first
pension buy-in transaction in the U.S.,
it marks an important moment in how
defined benefit plan sponsors handle risk
management.
Hickory Springs Manufacturing Co.,
in Hickory, North Carolina, had signed on
as Prudential's inaugural pension buy-in
client, completing a $75 million pension
risk transfer. The transaction centered on
Prudential's Portfolio Protected Buy-In, a
single-premium, separate-account solution
serving as a plan asset to help the
plan match its assets to its liabilities.
Hickory Springs' DB plan had been
more than 100% funded before that but
saw a " huge decline " in asset returns
during the collapse, then-Chief Financial
Officer (CFO) Stephen Ellis later recalls.
In a 2012 PLANSPONSOR story honoring
the company as a Plan Sponsor of the Year,
he will note that the plan had recently
experienced similar volatility. " Having
gone through these issues twice in the
past nine years, we realized that we had
to do some things differently, " he will say.
24 PLANSPONSOR.com February-March 2018
The U.K. had taken the lead in
pension de-risking, the concept taking a
while to catch on in the U.S. " With north
of $2 trillion in total pension liabilities
[in the U.S.], there are plan sponsors
looking for ways to transfer risk out of
their pension plans, " one consultant
told PLANSPONSOR in a February 2010
story. " We are starting to see folks assess:
'What are we ultimately trying to do in
terms of our obligation?' I don't think
there will be much short-term activity.
The real effort is to plan for mid-term
activity-two to five years. "
By 2011, American defined benefit
plan sponsors are seeing the idea's attraction,
and interest in various pension risk
buy-in and buy-out structures is starting to
increase dramatically. Prudential's completion
of landmark pension risk-transfer
deals with General Motors and Verizon,
in 2012, will bring widespread attention to
the concept.
Spurred by factors including funding
pressures and steadily rising PBGC
premiums, sponsor interest in pension
risk transfers will only continue.
the use of income annuities, today's guidance
can help retirees protect themselves
from outliving their savings. "
The 2017 PLANSPONSOR Benchmarking
Report will show little uptake
in usage of retirement-income products,
however. In fact, the numbers will have
declined from those in the 2014 report.
Overall, DB-ification of DC plans
has been continuing. The 2017 PLANSPONSOR
Benchmarking Report will
provide a glimpse of DB-ification's impact:
That year, plans without automated design
features will average 73.6% participation,
while plans with auto-enrollment and autoescalation
average 88.4% participation.
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PLANSPONSOR - February/March 2018

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