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I am the CFO for a $750M transportation company with about 2,500 employees and the company is privately held. We have a defined benefit plan. In the past, our primary factor to determine what our contribution would be to fund the plan was the amount that was tax deductible. We chose this single factor to maximize the tax benefit for our family shareholders. That tax deductible amount has increased over the years such that it is far in excess of what the plan liability is. As a consequence, our plan is fully funded.
We would like to implement a defined benefit plan funding policy that takes the tax deductibility into consideration, along with any other relevant criteria. We would be interested in hearing from other members who also have defined benefit plans and what their funding policy is based on.
Regards,
Brad McKeown (bradm@Lynden.com)
Response:
We are a Government contractor and we maintain five separate DB plans as the result of business acquisitions. For each plan, we fund the greater of (1) the minimum amount required by ERISA plus any additional amount required to avoid any AFTAP penalties or (2) the amount recoverable in our pricing under Government Cost Accounting Standards (CAS) regulations. AFTAP would not apply to fully funded plans. The CAS limitation becomes the funding amount only in the highly unusual situation when it exceeds the ERISA minimum.
As a suggestion, any decision to contribute more than the ERISA minimum, up to the tax deductible maximum, should be based on a return comparison for the "excess contribution" between the plan return assumption and alternative Company investments. Usually alternative cash use strategies will "win" this analysis.
Anonymous
Response:
We faced the same issue as a privately owned (family and trusts) company. We funded the maximum amount allowable by tax regulations UNTIL the regulations changed and virtually unlimited contributions were allowed. Since we were well funded at that time we changed our criteria to fund the "normal cost" of the plan (which was greater than the minimum contribution). Our logic was that this represented a long run average cost of the plan. This struck a balance between current year cash flow and tax deductions.
Given recent market conditions and the lower discount rates being used to value the present value of future benefits we now have "on paper" fallen below a fully funded state. However, we continue to fund under this strategy with the belief that we are doing so for the long term and that as markets recover and discount rates change we will again be fully funded. If the current investment/interest rate environment continues for a long period of time we plan to reevaluate this strategy.
I know this is just one approach along the continuum of options. Hope the thought helps.
Bob Scherba (RScherba@williams-int.com)
Response:
You may have thought of these things already but a couple possibilities that occur to me are:
1) Do you have a 401k plan as well? That might be an option.
2) You probably need situationally specialized tax and/or actuarial advice on this. We use Milliman as our actuary and I have been happy with their advice.
3) Might be some other types of plans (deferred compensation, etc….) that could benefit the people you want to benefit
Have a good one and good luck with this.
Regards,
Carl Walker (cwalker@reinhold-ind.com)
Response:
Congratulations on having a fully funded plan. I’ll bet you hear from some who are in different situations than yours. If a plan has a significant portion of the funds invested in equities, they’ll probably find themselves in both positions from time to time due to market volatility. So a funding policy that blindly dictates a specific funding level without the ability for management judgment to be considered will eventually lead to an inappropriate funding level in one direction or the other – as you are finding out.
Over the years, we have dealt with both underfunding and overfunding and for many years we had no policy guidance for either situation. With the benefit of hindsight, my wish is that we would have had a somewhat flexible policy with minimum and maximum funding levels and targets tied to the actuarial plan liability – probably either the ABO or PBO. Such a policy has the curbs necessary to keep the plan healthy while providing the flexibility for a CFO or Investment Committee to fund the plan based on 1) the condition of the business and its ability to fund contributions and 2) current and expected future performance of the portfolio. If you have good actuarial assumptions, the actuarial liabilities are the best measure of future obligations. I would avoid setting funding goals based on IRS deductibility or PBGC requirements as they are not always in tune with the actual accumulating benefit obligations.
Hope this helps.
Don Munchrath (dmunchra@csystems.com)
Response:
I applaud your owners on the conservative funding plan. Most companies only fund up to either the amount necessary to become "fully funded" or negotiate an amount with the trustees or regulator. However, being fully funded does not mean the plan has enough assets to meets its obligations down the road as assumptions on mortality, investment return and discount rate may under or overstate the cash liability.
Regards,
Andreas Rothe (Rothe@pbworld.com)
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