Impact of Poor Investment Results

[Stash026]

I got a question from a client and the person that normally handles our Cash Balance Plans are out.  They wanted to know what happens if the cash balance investments perform poorly.  Is the employer on the hook to make up the lost interest?  Is it annual (additional required contributions for the shortfall)?  

Sorry for the question, just wanted to hopefully get back to them quickly.

Thanks in advance!

[david rigby]

Lots of moving parts here.  "It depends."

[Stash026]

The Plan is set to give a Cash Balance of $3,000 to the rank and file each year.  It's more of a general question, should the plan be underfunded in a given year if they will be on the hook for a greater contribution, like a "traditional" defined benefit plan

[C. B. Zeller]

One of the key defining differences between a defined benefit plan and a defined contribution plan is that in a DC plan investment risk is borne by the participant, and in a DB plan the investment risk is borne by the sponsor. So yes, it is possible that the sponsor could be on the hook for larger contributions if the assets perform poorly. It's also possible that the MRC is zero despite the value of the assets. It's impossible to know without more details specific to the plan.

[CuseFan]

A simple non-actuarial general response is that yes, to the extent asset under performance results in the plan being under funded then the employer will be responsible for additional contributions, but on an amortized basis (pay off the shortfall over time) rather than an immediate dollar for dollar requirement. As noted above, there are a lot of moving parts and actuarial calculations and other experience related items like forfeitures that enter the equation.