Steering the financial end of a business, whether it be a sole proprietorship, a small company, or a big corporation, can be challenging under the best of circumstances. Throw a defined benefit pension plan (DB plan) into the mix, and you’ve got an additional set of opportunities and risks.
For small business owners, the opportunity comes in the form of large, tax deductible contributions. That opportunity is as available today as it has ever been in the past. However, for many larger corporations, the risk of a DB plan can often outweigh the reward, especially in today’s economy.
The problem is that DB plans, while long-term in nature (benefits are expected to be paid out over many decades), are treated as short-term commitments by both the IRS and the Financial Accounting Standards Board. Both of those agencies require that plan liabilities be valued as if the plan was terminating and paying out participants today.
In certain circumstances, that treatment is tolerable. However, in today’s markets where asset returns have been tremendously volatile and where the Fed is working to keep interest rates at historically (and artificially) low levels, unfunded DB plan liabilities can spike, wreaking havoc on the plan sponsor’s bottom line.
This news release from the American Benefits Council does a good job of explaining these dynamics, and has a link to a simple proposal for funding relief that would considerably ease the burden on DB plan sponsors beginning with 2012 plan years. The proposal is simple, logical, and necessary for the short-term preservation of these plans that provide vital benefits to millions of retirees. Adoption of a proposal like this would help illustrate the fallacies of current funding and accounting rules, and be a push in the right direction for the long-term viability of DB plans.