Insurance Center

Employers today are dealing with rules that have been introduced regarding funding of pensions, introduced in 2008. Today, corporations and to fund their pensions with regard to the value of plan assets as they relate to liabilities (the present value of retirement payouts as projected, based on accrued benefits). Under the old funding rules, pension sponsors could use a five year period to smooth their asset values based on market returns. Under the new rules however, only a two year period are allowed in order to average their returns, while average assets cannot exceed current market value by a figure of more than 10 percent.

As regards company balance sheets, these current rules much more closely reflect the so-called mark-to-market rules that have been carried out in corporate accounting. According to these rules, rather than being smoothed out over time, assets are "marked" or valued at what the market will pay for them on a given day.

According to Watson Wyatt senior retirement consultant, Kevin Wagner, the current federal bailout of the credit markets is an admission that in intense cases, the mark-to-market principle will not work. He believes that the present crisis should generally increase pressure to reconsider mark-to-market principles. He argues that if there isn’t some relief, by next year, a continued downturn in asset values will perceptibly increase obligatory contributions to pension plans, when plan sponsors will also have to deal with significant business pressure.
Especially as regards accounting measures, this pressure, will be offset by some degree by the effects of higher corporate bond rates on pensions. With the rise in rates of high-quality corporate bonds, as has been happening, there is a drop in the present value of future retirement payouts (or plan liabilities).

And, according to the national director of Watson Wyatt's defined contribution Robyn Credico, the practice of dealing with the workforce management risks that is most effective is for 401(k) sponsors to be sure to act to step up the oversight and governance of their plans. Credico says that the industry is now in a very litigious environment, and that the sharp downturn in the market downturn will only increase matters.

At the same time, Credico warns against taking hasty actions. He warns that this is not the time to switch 401(k) vendors or to change investment choices unless you feel that this is absolutely necessary. He says that at this time the market is too fluid to make any possible changes in one’s 404K program.