Cost in Absence of Value

Cost in Absence of Value

Throughout my sales career, several mentors told me the catch phrase, “Cost is only an issue in the absence of value.” Of course, I usually hear that and think about it from my perspective. 


It’s always important to add value to your business and personal relationships. But, when you talk about the added benefits of guaranteed income, you have to offset the cost with value. In many cases, the value of guaranteed income far outpaces the cost associated with the purchase of the vehicle to provide the guarantee. 


Now, it’s important to convey the same message to clients and not just sales teams. Specifically, we need to talk to company CEOs and human resource directors about the risk of their pension plans. 


Cost of Pension Plans

Today, billions of dollars sit in defined pension plans that have been frozen by employers. Those pension plans are no longer helping recruit new talent to the company or retaining existing employees. More worrisome are the expected increases to costs: 

  • The cost of administering a fully funded pension plan is guaranteed to increase by 25 percent by the end of 2019, due to the cost of Pension Benefit Guaranty Corporation (PBCG) premiums*
  • For plans that are not fully funded, the cost of maintenance might increase as much as 33 percent by the end of 2019* 


Those are real increases and real dollars that will be spent on an employee benefit that is not being leveraged to the full extent. So, the question is: Why would a company have a benefit that is going to increase in cost but doesn’t provide any benefit?


I doubt any CEO would invest in a new plant or machinery that didn’t have a suitable return. Especially with human capital, companies are reluctant to invest in additional funds without a plan to grow production through that investment. They shouldn’t do the same thing for an expensive employee benefit that is not providing value. 


The cost of additional contributions is expensive. Life expectancies have increased and returns are much lower than many old plan assumptions. Both of those result in funding shortages for a lot of defined benefit plans. Currently, CEOs are faced with making large contributions to bring the plan up to proper funding status. Since many are not willing to do that, they are left with the same problem year in and year out: an underfunded pension plan not benefiting the organization. Well, it’s about to create more of a drain due to the cost increases from the PBGC premiums. 


Value of Transfers

Myths exist around pension risk transfer business. Many believe that a company has to write a huge check to cover their shortage. Instead, in many cases, it makes sense to stagger the plan termination over a period of several years. Cash flow and capital requirements might make it easier to have a 5-10 year strategy instead of a one-time contribution. 


Another myth is that lump-sum distributions don’t help. In reality, lump-sum distributions can make a difference in the amount of shortage. Having educational meetings with employees can help the engagement level of lump-sum distributions. That’s where a good income specialist can benefit the employee base. Retirement remains the most complicated problem most Americans will face; our industry needs to be face-to-face with as many people as possible.


Winning Strategy

Take the cost of the least valuable employee benefit off the table for companies. In doing so, you can help a greater number of people retire more securely. 

Policy Review - 10 Ideas For Existing Life Insurance

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Watch the replay of the webinar where we talk how pension risk transfers can be an effective tool for defined benefit plan sponsors seeking solutions for rising costs and longevity risk.

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About the Author

Mike McGlothlin is a tireless advocate for the retirement planning industry. As executive vice president of retirement at Ash Brokerage, he heads a team providing income planning solutions focused on longevity and efficiency. He’s also a thought leader who provides guidance and assistance for advisors and broker-dealers navigating marketplace and regulatory changes. You can find a collection of his blog posts in his book, “Above the Clouds … Winning Strategies from 30,000 Feet.”


*Pension Benefit Guaranty Corporation, Premium Rates, March 2018: