Do you work for a company that comes with an active risk management policy? Do you consult with companies that manage risks or should? Are you in a benefit plan that may or may not manage risks? Then, this is for you perhaps. Much has been manufactured from risk management in recent years. Let’s focus on employee advantage programs, both executive and broad-based.
Most everyone out there will some sort of risk management in most of their welfare advantage plans. Their healthcare plans are often fully covered by insurance, or if not, they at least have some type of stop-loss insurance in place. And, year they know that they can boost the employee portion of cost-sharing next.
With respect to other welfare benefits, LTD plans tend to be fully insured, life insurance programs as well. Consider them, in practically all of these plans, employers are pooling their risks. Suppose we consider retirement plans. What a trendy topic to create about: risk. The word has been out for nearly 25 years now. Escape defined benefit plans.
Diligent readers (I’m sure I’ve at least one) will recall that I had written several weeks back that one DB programs (specifically cash balance) handled properly are less dangerous than 401(k) plans from the plan sponsor standpoint. Since no one commented on this, can I presume that everyone who read it decided with me?
- Non-control investments from as little as $2 million
- It was setup in 1963
- Manage your debts carefully
- US Individual Retirement Accounts (IRA) and 401k
- Does the company allocate capital efficiently
- What area the Investments were made in
- 10 % 0,5 %
In any event, anyone who handles qualified programs has found out about risk management, LDI, and a lot of other trendy terms. When I got into this carrying on business, larger companies than not sponsored DB programs, and few do anything to control their natural risks extremely. Now, only those who believe these are omniscient regarding both interest rate movement and equity and fixed income prices do nothing.
In my experience, very few companies even here evaluate their dangers, but most companies have them. Suppose an employer provides a matching contribution in their 401(k) plan and all of their marketing communications to employees are successful. Then, employees shall contribute more and employers will be on the hook for more coordinating efforts.
Isn’t this a risk? I think it is. How many companies forecast this under any, let many scenarios alone? Many private or held companies sponsor ESOPs closely. Whenever a private company sponsors an ESOP, isn’t there really only 1 way to pay out plan participants when they terminate with a vested benefit? And, isn’t that to repurchase the shares?
I know that we now have some companies out there that perform (or did to them) an evaluation of their repurchase responsibility. For the ones, who don’t, in my opinion, they are just moving the dice. I’ve seen a lot of companies scrap their defined-benefit plans in favor of a profit sharing plan. Let’s employers (as a group) control their dangers in these programs? Will be the obligations too small to worry about? Is it because they are executive plans and since they may not get ERISA protection just, they are not worthy of risk management?
Is it because they don’t really know how? Could it be because they haven’t considered it? Let’s go back a couple of years, say to some point before 1986 (there were sweeping changes to tax laws like the treatment of certain life insurance products). Nonqualified programs were much smaller than they are actually. But the guarantees made in most of them were just ordinary silly. I’m alert to one former Fortune 100 company (the company no more exists due to acquisitions, but its particular identity is irrelevant) that promised a return in excess of 20% annually in its NQDC plan.
They funded the program using COLI, and they could point to broker illustrations that showed that was looked after. I’m sure that there were others out there that did similar things. Remember that whoever it was that designed the plan (internally) would benefit from that large rate of return. And, they also knew if they thought about it that the potential risks that they created for the company wouldn’t become really obvious until once they had become a rich retiree. Why didn’t the corporation manage this risk better? These were using the same mentality that many others have used in a retirement plan investment context — that of total return.