EFI president develops new DB plan model

By: Kevin Olsen

Published: May 29, 2013 - Pensions & Investments

A new defined benefit pension plan design is being touted as not only a substitute for defined contribution plans, but as an opportunity to improve on the amount of benefits received in traditional DB plans.

The Double DB Pension model was developed by Ed Friend, president of EFI, and is designed to replicate the same contribution funding of DC plans, but in a pension plan. The plan has two tiers, with all assets managed in a single trust — the first tier being a “regular DB” and the second a “partner DB.” The regular DB plan is designed to be 100% funded every year, with the partner plan fluctuating based on prior performance, Mr. Friend said in an interview.

The same funding percentage will be contributed by employers and employees to the overall plan every year, similar to DC plans with employer contributions. In the first year, the contribution will be evenly split between the two plans. After that, the split will depend on the previous year's performance. If returns are lower than expected, the contribution split protects the actuarial funding of the regular DB component. The contribution to the partner plan would then be reduced and vice versa in years of outperformance. Changing mortality rates are also part of the calculations that determine the split.

“It's taking advantage of the fact that the DC system, which this is intended to replace, requires a contribution every year,” Mr. Friend said in a telephone interview. It would prevent companies or public entities from taking funding holidays as well as having to make large contributions some years to close funding gaps, he added.

Mr. Friend said the plan design has been extensively back-tested and actually provides a better overall benefit than traditional existing DB plans.

“It's more advantageous for this (plan) than a regular DB plan because it's getting funded every year,” Mr. Friend said. “I expect the private sector to convert back to this from where they're at with DC plans.”

The design has not been adopted yet, but Mr. Friend said there is quite a bit of interest in plans trying to get more information on the design.

More information and examples can be seen on the Double DB website created to promote the plan.