U.S. Retirement Plans Face Acute Funding Pressures

BNY Mellon Asset Servicing Study finds many providers are cutting benefits

U.S. providers of retirement plans face unprecedented cost pressures in providing their programs, according to a new study published Friday by BNY Mellon Asset Servicing. The study, which was produced in conjunction with research and consulting firm Finadium LLC, found that many providers are reducing the benefits they offer or are looking to rebalance funding between employers and employees as they try to manage their finances.

The studyRedefining Retirement: What Changes to Defined Benefit and Defined Contribution Plans Mean for Plan Sponsors and Their Service Providers—concludes: “There is little question in the minds of plan executives that they will either pay now for their retirees' benefits or that they, or society, will pay later: The main questions are how much and interrelated are those two costs and how far will the implications stretch."

These were among the study’s key findings:

  • Retirement benefits packages continue to be seen as an important part of employee hiring and retention. Fifty percent of private company executives surveyed said that their plans made them more competitive as an employer, whereas 73% of public plan executives felt that their plans were an asset.
  • The attractiveness of defined contribution plans for employers lies in the reduction of funding volatility; in the long run, funding costs for defined contribution may be higher or lower than current costs, but the ability to control volatility is seen as an unparalleled advantage.
  • Hybrid defined benefit/defined contribution plans offer the professional management of defined benefit with the portability of defined contribution; some type of hybrid plan may be the best solution for employers and employees if employer costs can be managed effectively.
  • Executives are looking to their service providers for helpwith some of their most pressing challenges, including assessing performance for private equity and other illiquid assets, and defining new strategies for ensuring a stable retirement for their employees.

"Selecting a retirement plan implies not only a financial commitment but also a strategy for ensuring the well-being of tomorrow's retirees,” Josh Galper, managing principal at Finadium,

said in a statement. “The plan executives surveyed for this study recognize the importance of this decision, along with the need to do more with less for the good of their employers."

Laurin Moore, head of the U.S. tax exempt business at BNY Mellon Asset Servicing, said in the statement that the most pressing issue sponsors of defined benefit and defined contribution plans have to address is how to provide retirement benefits that offer employees sufficient funding without causing further strain to employer balance sheets or government budgets. “To meet this challenge,” Moore said, “plan sponsors are looking to their custodians and asset managers for not only investment returns, but also tools for managing performance and ideas for successful program structures."

In particular, 55% of plan sponsors surveyed expect to need greater assistance in respect of performance measurement, while 35% expect the same in respect of risk management, particularly for illiquid investments in their defined benefit programs.

The study is based on interviews with large U.S. pension plans conducted in June 2010, accounting for nearly $750 billion in assets across 30 retirement systems (16 corporations and 14 public entities). Of the systems surveyed, 81% of assets were in defined benefit plans, with the remainder in defined contribution and a handful of health care retirement accounts. More than two-thirds of the plans surveyed held assets in the $5 billion to $50 billion range.

Finadium is a research and consulting firm focused on financial markets. BNY Mellon Asset Servicing offers clients worldwide a broad spectrum of specialized asset servicing capabilities, including custody and fund services, securities lending, performance and analytics, and execution services.

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