Who manages the risk? Milliman Sustainable Income Plan® (SIP) solves the DB/DC conundrum

Benefits of the SIP

• Similar to a defined contribution (DC) plan from a finance perspective
• Similar to a defined benefit (DB) plan from a benefits perspective
• Simple to explain to participants
• Provides more equitable benefits to older and younger participants relative to DC or cash balance plans
• Gives participants the upside of the market, while providing some downside and inflation protection

What’s a retirement plan for?

Retirement plans meet the social need for securing the income of people in old age. They can also be an integral part of a desirable benefits package by attracting and retaining employees and assisting in succession planning.

What’s the problem?

Financial market risk provokes responses from defined benefit (DB) plan sponsors and defined contribution (DC) plan participants that undermine the basic goals of their retirement plans.

Traditional DB plans are very good at delivering secure benefits. However, over the last 40 years, contribution and funded status volatility have threatened the viability of many sponsors. As a result, many have shifted to DC plans. While DC plans solve the contribution and funded status volatility problems for employers, they have left participants with inadequate retirement savings. Participants don’t defer enough, and their asset allocation decisions result in performance that lags behind that of professionally managed pension funds.

Hybrid solutions fall short

Cash balance and other “hybrid” plan designs have attempted to find some middle ground, a place where sponsors can make stable contributions and participants can build adequate retirement income.

The SIP is a variation on a plan design that has been legal since 1953. In the basic 1953 design, benefits are accrued just like they are in a traditional DB plan (usually on a career average basis). The benefits then move up and down based on the fund’s actual investment return. The liabilities and assets stay in balance and the plan maintains 100% funding in all market conditions. This funding stability, though, comes at the cost of volatile benefits, even for retirees.

Enter the SIP

Regulations published in 2014 have paved the way for the most exciting innovation in retirement plan design in 40 years, the Milliman Sustainable Income Plan® (SIP). The SIP improves on the 1953 design by retaining the contribution and funded status stability while preventing retiree benefits from declining in down markets. This is accomplished by providing smaller benefit increases when returns are particularly good to build a reserve that prevents benefit declines when returns are poor.

The SIP stays funded in all market conditions just like the 1953 design, but it provides inflation-protected benefits to retirees, all with stable, predictable contribution requirements.

The SIP truly provides the best of both worlds, combining the stability and predictability of the contributions found in a DC plan along with the secure lifelong benefits of a DB plan.

The SIP balances the risks

The chart shows how well plan designs compare on important features. Green squares are best. Gray squares are worst. You can see that defined contribution plans do well on funding considerations while defined benefit plans do well on benefits considerations. Cash balance plans are somewhere in between.

The SIP meets both funding and benefit needs well. It is a solution that can restore the ability of employers to provide a retirement plan that fulfills its intended mission.