This is a fictional case study intended to showcase the actions, advice and services that The Mahoney Group can provide defined benefit plans. Any similarity to actual organizations is entirely coincidental.
After nearly a decade of volatile pension contributions and overall frustration with pension plan management, a public company decided to freeze its $110 million pension plan thinking the problem would go away. (We know from experience that it can get worse.)
They would have liked to terminate the plan, but the liabilities had grown larger and it was too badly underfunded, so they hired The Mahoney Group to help them “de-risk” the plan and manage assets more effectively. Despite strong market returns, their frustration with a declining funded status had come to a head.
We believe a point of differentiation at The Mahoney Group is that, instead of just focusing on the asset side of the ledger, we address the liability side. We understand how to hedge liability risk and make it a point to speak with actuaries more frequently to measure liabilities throughout the year. We know how to take clients from badly underfunded to fully funded to termination.
We took on the project and set objectives for improving the funding status, reducing volatility in required cash contributions and in FAS 87 expenses, with the overall goal of minimizing the impact on the client’s financial statements over time.
After our due diligence, we discovered that the plan was run by the actuary who was disconnected from the investment advisors, recordkeeping and administration. Everyone was living in their own silo and nobody was quarterbacking the relationship.
We engaged the actuary and others to work together to monitor assets and liabilities on a regular basis. We also researched plan service providers who have the capability to assist with the monitoring of assets and liabilities.
We revised the Investment Policy Statement (IPS) to outline a plan for de-risking assets as the opportunities presented themselves through the adoption of a dynamic asset allocation that was designed to become more conservative as the plan’s funded status improved.
Working with the client’s Investment Committee, we were authorized to react to market movements by lowering equity market exposure from 60% to 20% over time as funding status improved. Equity analysts commented favorably regarding measures to match assets and liabilities in order to reduce the plan’s impact on the client’s financial statement.
Once the funding status reached 89%, we dollar-cost averaged into a liability-driven investment approach, designed to protect the gains in the funded status. The client committed to continuing the policy of contributing enough to meet the plan distributions, which helped support the plan’s overall health.
Once the plan reached fully funded status and was terminated, working with the Committee, we shopped for and purchased annuities, which allowed our client to transfer the liability off of their balance sheet onto the annuity provider, a large, stable insurance company. Simply choosing the lowest cost proposal would not meet the requirements of IRS DOL Interpretative Bulletin 95-1. This is why we began with a qualitative analysis of each insurance company under consideration and encouraged the Committee to establish a sub-Committee tasked with annuity provider analysis.
We held one-on-one meetings with each employee, explaining the option of taking a lump sum or receiving an immediate annuity or deferred annuity. We showed them the math, and the pros and cons of each choice.
While other advisors can provide some or all of these services, we are dedicated to serving as proactive plan consultants, delivering high-touch service and utilizing the advanced plan tracking tools at our disposal to best serve the needs of our defined benefit plan clients.
This investment profile is hypothetical and not indicative of any specific situations or clients. It is presented only as an example and not intended as investment advice. There is no assurance that any investment strategy will be successful. Investing involves risk and investors may incur a profit or a loss. Asset allocation and diversification do not ensure a profit or protect against a loss.