Putnam Strategist: DB Schemes Are Alive And Well

Peter Chiappinelli, director of institutional investment strategy and research at Putnam Investments, is flying a contrarian flag. Despite all the recent headlines about U.S. corporations freezing their defined benefit plans, he argues that most defined benefit plans will remain alive and well and continue to grow. Chiappinelli said public entities and corporations will continue to invest in DB plans because they offer a competitive advantage in attracting good employees. He added that DB plans employ more sophisticated investment strategies than DC funds. "It is undeniable that a DB plan is run more efficiently than a bunch of individuals," he said. He expects Taft-Hartley funds and any other plan that is backed by a union to have a difficult time switching to 401(k). Putnam is "working on coaching plan sponsors to loosen their constraints and allow for more innovative investment techniques to solve problems," he added, declining to elaborate.

Jim Klein, president of the American Benefits Council in Washington D.C., is an advocate of DB plans but is less optimistic about their immediate future. "We believe strongly in the value of the defined benefit plan," he added. "During good economic times, funding can be less for a defined benefit plan than a defined contribution plan." He said the challenges to the system--unpredictable funding obligations and the looming change in accounting rules--are two areas that currently dissuade companies from holding onto a DB plan. Klein predicts that a generation from now, Congress will "wake up" and realize it needs a defined benefit system but in the meantime, he isn't surprised that more companies are bailing out in favor of DC schemes. The council is adjusting to this change and is now working on ways to make DC plans more successful.

Meanwhile, a poll conducted recently by SEI Investments revealed that 56% of respondents have already closed, frozen or terminated their plans or will consider doing so this year. The poll was comprised of 151 executives who are responsible for managing plans ranging from $25 million to more than $3.5 billion in assets. They expect pension reform to make matters worse, with 78% saying reform will make plan management more complex and 62% admitting that their organizations aren't fully prepared for the impact pension reform will have on their fund.