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How defined benefit plans can help grow your business

Pension plans still offer an untapped opportunity.

defined benefit plans

Current health of the DB market*

45,610 DB plans
36 million participants
$2.9 trillion in assets

*as of 2016

Contrary to popular belief, defined benefit (DB) plans still provide a significant opportunity for advisors — and will continue to for a long time to come. This presents an opportunity for you to become a trusted resource and elevate your role as an advisor.

Use these three steps to get started.

Step 1

Spot the opportunities

The majority of DB plans exist in small-to-medium-sized businesses with less than $1 billion in assets.

Many small- to medium-sized businesses lack the internal resources to effectively manage their DB plan in-house. Many business owners worry about the rising expense of maintaining a traditional pension plan or they’ve already frozen their plan and just looking to get out from under it. That means they’re often seeking advice and guidance.

That’s where you come in.

One of the best places to start looking for business leads is with your 401(k) clients —  many organizations with a DB plan also have a defined contribution (DC) plan. Look particularly at plan sponsors who have DB and DC plans with different providers. By moving both plans to the same provider, you could make life a little easier for the plan sponsor by keeping all retirement business in one place.

Expand your referral base

As you expand your role with DB plans you may be surprised at some of your new connections. Since so many different individuals are involved in pension plans, it may offer new contacts for your business.
Referral base expansion ideas

Two ripe opportunities

To better understand the strategic opportunities and challenges facing an organization’s DB plan, start by evaluating the plan as it stands today. Look at these factors, which can be found on the Form 5500.

1. Tax-exempt organizations
In addition to the private sector, make sure to consider tax-exempt organizations, many of which still have DB plans.
49.4% of tax-exempt organizations
2. Small professional organizations
While there aren’t a lot of new DB plans, small start-ups are an area of new plan growth. Mostly professional firms, these organizations use DB plans to help business owners maximize their retirement savings beyond what a qualified DC plan can do. Although the audience is small, it might be another opportunity to reach a new market — and to expand your business as these start-ups become more established.

plan size graph

Understand the nuances of DB plans

Whether a plan is active or frozen, it’s critical to connect the risk management strategy with the organization’s goals for the plan. With a typical DC plan, advisors tend to work most closely with an organization’s HR team. However, since a DB plan directly impacts an organization’s balance sheet, it’s more likely to get the attention of the CFO and possibly even the CEO as well. The best way to be viewed as a trusted advisor in the eyes of the C-suite is to help them work through an effective DB plan strategy — which many organizations may lack.

A solid strategy begins with a DB plan review

To better understand the strategic opportunities and challenges facing an organization's DB plan, start by evaluating the plan as it stands today alongside the current economic outlook. Rising or falling interest rates, an ongoing recession and/or a bull vs. bear market can dramatically shift DB plan liabilities and risk — and therefore, your strategy. Look at these three factors.

  • DB plan’s funded ratio

    A frozen plan looking to terminate soon requires a different funded ratio than one that’s active.
  • DB replacement ratio

    Is the current benefit formula meeting the plan sponsor’s goals and objectives?
  • Other relevant factors

    Things like changes in management or evolving market and industry trends can impact an organization’s DB needs.

No one-size-fits-all approach

When working with C-suite executives, it’s important to explain no single strategy is right for every organization. Successfully managing a DB plan is really an exercise in managing risk — by matching that plan’s liabilities to an investment strategy that balances it.

Offer a holistic approach

Successfully advising a DB plan means helping the C-suite focus first on strategy, then implementing the proper tactics to meet the strategic objectives. DB plan sponsors are looking to efficiently and effectively manage their risk. Many think their plans are too costly and too complex, but they don’t know how to fix. They could be stuck in a cycle of making tactical decisions without a big picture view.

You can offer a fresh perspective with real data and action points to get CFOs/plan sponsors unstuck and moving toward a smart strategy for meeting their plan goals.

Get plan sponsors unstuck

  • Educate and empower plan sponsors to manage their DB plan according to the needs and goals of their business.
  • Provide a strategy as well as tangible action steps to help plan sponsors achieve their goals.

While each plan is different, a comprehensive strategy could include these considerations:

  1. Plan goals
  2. Review of participant data
  3. Risk management approach
  4. Funding policy
  5. Plan funding ratio
  6. PBGC premiums and plan fees/costs
  7. Investment approach, including asset allocation and glidepath

Once you’ve determined the goals driving the business and influencing the DB plan, it’s time to work with the actuarial team to develop a risk management strategy.

Two options for managing DB plan risk

1. Transfer the risk to someone else by offering lump-sum distributions or purchasing an annuity.
2. Retain the risk within the organization through plan design or investment decisions, such as dynamic asset allocation or liability-driven investing.

how DB plan sponsors remove risk

Bottom line

Make selling and servicing DB plans part of your practice

The assets held in existing DB plans will require close management for years to come. Plan sponsors could need your help creating and executing a successful strategy that meets the needs of their businesses. The value of DB plans goes beyond the financial — pensions represent an often decades-long promise between an organization and its employees. By focusing on the human perspective underlying the pension plan, and better understanding the market, you’ll be ready to use DB to expand your business.

If you want to learn more about DB plans and how you can help grow your practice, call our Advisor Support Team at 800-952-3343, option 2.

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PQ12448  |  497394-052018

The subject matter in this communication is educational only and provided with the understanding that Principal® is not rendering legal, accounting, investment advice or tax advice. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, investment or accounting obligations and requirements.

Principal, Principal and symbol design and Principal Financial Group are trademarks and service marks of Principal Financial Services, Inc., a member of the Principal Financial Group.

Insurance products and plan administrative services provided through Principal Life Insurance Co. Securities offered through Principal Securities, Inc., 800-547-7754, member SIPC and/or independent broker-dealers. Principal Life, and Principal Securities are members of the Principal Financial Group®, Des Moines, Iowa 50392.

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