De-Risking & Asset Allocation Shifts in DB Plans : Strategic de-risking is an opportunity to realign with organizational goals
Shifts in DB Plans
Defined benefit plans are undergoing a strategic transformation. Many sponsors are now enjoying improved funded statuses, largely due to robust equity performance and a prolonged high-interest-rate environment. This shift presents a crucial inflection point for plan management.
The core driver of today’s de-risking efforts lies in the mathematical interplay between plan assets and liabilities. Elevated discount rates have decreased the present value of liabilities, while strong asset growth has improved plan funding levels. This convergence has moved many plans from deficit to surplus territory, a scenario rarely seen in the past decade.
In response, sponsors are reallocating from equities to fixed income to lock in gains and reduce funding volatility. This isn’t mere risk aversion – it’s a disciplined liability-driven investing (LDI) approach.
By emphasizing long-duration bonds that better match liability durations, sponsors are mitigating interest rate risk and stabilizing contribution schedules.
Beyond the basic shift from equities to bonds, plans are refining their fixed income exposures. They’re adding credit, global debt, and inflation-linked securities to better manage risk and capture enhanced yields.
Notably, well-funded plans are exploring surplus strategies – segregating excess assets to pursue growth via alternative investments and equities. This dual-portfolio model allows for risk-controlled liability matching while optimizing returns on surplus assets.
However, such strategies must adhere to ERISA fiduciary standards and account for accounting implications. Advisors play a critical role in guiding sponsors through asset-liability modeling, risk budgeting, and compliance evaluations.
Ultimately, improved funded status grants flexibility. Advisors can help sponsors understand that strategic de-risking is an opportunity to realign with organizational goals, not just a default next step.
