As previously written about on this blog in April 2014 and May 2013, variable annuity pension plans (VAPPs) are regaining interest for retirement plan sponsors because their structure combines many of the strengths of traditional defined benefit plans with the strengths of traditional defined contribution plans.
Defined benefit plan features of VAPPs
As with traditional defined benefit plans, benefits in a VAPP are paid for the lifetime of the participant and beneficiary. While the level of the benefit may not be guaranteed, stabilization strategies exist to dramatically reduce the possibility of retiree benefit declines and the participant does not need to worry about running out of money during retirement. VAPPs pool longevity risk within the plan and have professional asset management like a traditional defined benefit plan, enabling the plan to provide larger average benefits per dollar contributed compared to individually directed defined contribution accounts. These defined benefit plan characteristics are desirable for employers looking to attract and retain top talent.
Defined contribution plan features of VAPPs
As with defined contribution plans, VAPPs have controllable employer costs and no funding surprises. VAPPs maintain their funded status in all market conditions, which eliminates concerns about underfunding. This means that plan sponsors can set a target contribution level such as a fixed dollar amount or fixed percentage of pay, similar to a defined contribution plan. Additionally, participants participate in market upside, providing a portable benefit (meaning that a participant is not harmed by switching jobs mid-career) and expected inflation protection during retirement.
To learn more about VAPPs, visit this reading list.