LDI for cash balance retirement plans

Justin Owens, CFA, FSA, EA

Justin Owens, CFA, FSA, EA

Co-Head of Strategic Asset Allocation




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Defined benefit
LDI strategy

Explore the mechanics of CB plans and their liabilities, how they differ from traditional DB plans, and what opportunities exist to manage associated risk through investment strategy.

The first cash balance (CB) plans emerged in the 1980s. This new plan design attracted plan participants for its DC-like features, such as its account balance-type formula and benefits portability through lump sums.

This paper address how these two trends align with each other to meet plan sponsors’ risk-management objectives:

  1. Over the last 25 years, these CB retirement plan sponsorships have surged. In fact, about a fifth of defined benefit (DB) plans now include a CB benefit formula, and for many non-frozen plans, it is the part of the liability that is growing.
  2. At the same time, most corporate DB plan sponsors embrace liability-driven investing (LDI) strategies in their efforts to preserve plan health on behalf of participants and to manage the plans’ financial impact on the sponsoring organizations.
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