6 Pension Risk Management Strategies to Improve Plan Efficiency

Discover 6 ways to optimize your defined benefit retirement plan and how October Three can help, from modern plan designs to pension risk transfers. 

Efficient defined benefit plans strike a balance between strong pension risk management, the plan sponsor’s financial sustainability, and the retirees’ need for long-term security. Fortunately, there are straightforward ways to reduce risk and improve plan efficiency, whether your plan is frozen or active. Here are the top six strategies. 

1. Consider a Pension Risk Transfer 

A pension risk transfer (PRT) is when a company transfers some or all of its pension obligations to an insurance company or financial institution. Over the past decade, pension risk transfers have become a popular way for plan sponsors to manage risk. 

How it Can Help Reduce Pension Plan Risk: By offloading risks to another party, plan sponsors can better manage their financial exposure and liabilities while ensuring the stability of pension payments to retirees. Our free calculator can help you estimate how much a company could potentially save with a pension risk transfer. 

2. Reduce Liability with a Lump-Sum Window 

A lump-sum window is a specific period during which defined benefit plan participants receive a one-time lump-sum payment instead of monthly pension payments for the rest of their lives.  

How it Can Help Reduce Pension Plan Risk: A plan sponsor might offer a lump-sum window to manage pension liabilities, reduce investment and longevity risk, reduce ongoing administrative costs, or take advantage of changing regulations or accounting provisions.  

They can also be the optimal choice for some participants. Generally, taking the lump sum empowers individuals with flexibility and control over their own money, empowering them with wider investment opportunities, but also exposing them to longevity risk. Learn more about the lump-sum windows in our guide. 

3. Take a Deep Dive with an Independent Pension Plan Audit 

Pension Plan Audits can review the plan’s funded status, expenses, PBGC premiums, contribution policy, actuarial assumptions, and plan termination costs. 

How it Can Help Reduce Pension Plan Risk: An independent audit can empower sponsors to make the most informed decisions about their plan’s future, potentially leading to improved financial stability and better risk management. Whether it's freezing and terminating the plan, maintaining the status quo, or modernizing it, a pension plan audit equips you with the knowledge to make the best decision for your company. 

4. Maintain Data Cleanliness 

This strategy, especially if paper files are involved, should be regularly maintained to ensure accuracy. Enlisting the help of a competent administrator, a crucial part of an effective data hygiene strategy, can greatly alleviate the burden. An administrator can handle all the heavy lifting of a data clean-up, making it a seamless process for the sponsor.  

How it Can Help Reduce Pension Plan Risk: Clean and accurate data is paramount to optimizing your defined benefit plan. Incorrect information can result in overpaying participants and other errors. And, if a plan sponsor were to consider plan termination, disorganized data would delay the process and add additional costs. 

5. Modernize Your Plan Design 

When defined benefit plans became associated with high and volatile costs a few decades ago, employers began to shift the risk to individual employees through 401(k)s. However, many Americans miss the guaranteed lifetime income offered by defined benefit plans. The latest designs combine the best features of both, allowing plan sponsors to provide a plan design that not only works better for everyone involved — workers and employers — but also provides a more secure and predictable financial future for employees. 

How it Can Help Reduce Pension Plan Risk: These plans are sustainable with stable contributions and minimal risk for plan sponsors. Risk reduction is also not at the expense of employee benefits. Rather, these plans can foster employee loyalty and engagement.  Learn more about this plan structure with October Three’s PRIME plan. 

6. Outsourcing Administration Services 

If you’re currently administering your defined benefit plan in-house, a third-party administrator may be able to help you save time and money.  

How it Can Help Reduce Pension Plan Risk: Third-party providers have the advantage of working with various plans, which can provide insights into the experience modern participants and sponsors are looking for. Their refined processes and familiarity with the complexities of compliance and operations can reduce the chances of errors that produce risk.  

Outsourcing also simplifies the administration experience for sponsors and participants, from implementation to call center services and day-to-day management. Find out more about October Three’s administration offerings 

Ready to Optimize Your Plan? 

Managing your plan’s risk is one of the most important steps you can take.  

While it may seem daunting, the above solutions offer a clear path to achieving this goal. Not all tactics are a one-size-fits-all solution, but they can be effective when appropriately conducted. Ready to start optimizing your plan? October Three can help. Learn more about our risk management solutions.