Variable Defined Benefit 101

Traditional Defined Benefit (DB) designs are required to protect the dollar value of benefits earned, but because of this asset and liability mismatch occurs when investment returns lag assumed return rates. When assets are less than vested liabilities in multiemployer pension plans, employers are subject to continuing contributions to make up their share of this funding shortfall in the form of withdrawal liability should they withdraw. This contingent liability has hampered organizing of new employers to traditional multiemployer DB plans.

By design, a Variable DB virtually eliminates asset and liability mismatch by adjusting benefit accruals earned under the Variable plan to actual investment returns. A Variable DB design can also address purchasing power loss over time through the pension formula design and benefit adjustment features.

Transitioning to a Variable DB plan design will not solve any legacy traditional DB funding challenges, it can be an attractive solution to mitigate risk over time and ultimately deliver benefits that are better protected from inflation. As a new plan, Variable DB stays well-funded in all market settings, which virtually eliminates withdrawal liability risk making the design an attractive alternative to employers pondering the best way to deliver employer-provided benefits for the lifetimes of their employees.

Would Variable DB be a better choice for your participants?

Let’s discuss how a Variable DB might improve your plan’s overall health and reduce withdrawal liability risk over time.