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November 26, 2001 12:00 AM

CIEBA SURVEY: Both DB, DC assets decline for first time in a decade

But defined benefit plans lose less than defined contribution

Dave Kovaleski
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    BETHESDA, Md. - Assets declined in both defined benefit and defined contribution plans last year - the first time in nearly a decade, a survey by the Committee on the Investment of Employee Benefit Assets, Bethesda, reveals.

    Defined contribution plans were hit harder than defined benefit plans in 2000, declining 8%, according to the survey. Defined benefit plan assets fell 3%.

    "There's been an awfully long run of positive markets, so it's not surprising that you get this occasional hiccup," said David McNiff, manager of pension investments at Eastman Kodak Co., Rochester, N.Y., and chairman of CIEBA's Communication, Education, and Data Resources subcommittee.

    "Years like this remind people of the value of defined benefit plans," said Mr. McNiff, "Despite the difficult market conditions, they have held up fairly well in terms of assets."

    And because the employer takes on the investment responsibility, "defined benefit plans offer a security for participants that their own investment pools don't," he added. Eastman Kodak has $13.3 billion in assets, with $7.4 billion in defined benefit assets and $5.9 billion in defined contribution assets.

    Verified projections

    The CIEBA numbers confirm a Federal Reserve Board estimate reported earlier this year by Pensions & Investments that defined benefit and defined contribution assets declined in 2000. Using projections based on 1997 annual report data, the Federal Reserve estimated private pension assets overall declined 2% in 2000, with defined benefit plans down 4.2% and defined contribution, down 0.4%.

    By comparison, the CIEBA survey shows a much steeper decline in defined contribution assets than projected by the Fed, and slightly better numbers on the defined benefit side.

    Ralph Egizi, director of benefits and finance for Eastman Chemical Co. Kingsport, Tenn., attributed the declining assets to the down equity market in 2000.

    He noted that defined contribution plans did not fare as well as defined benefit plans due to a higher average allocation in equities. Also, he said, defined benefit plans tend to have a broader range of investments than defined contribution plans. Also, he said, 401(k) plans frequently invest in company stock, which can be volatile.

    The added diversification clearly helped in 2000, said Mr. Egizi, a member of CIEBA's Communication, Education, and Data Resources subcommittee. Eastman Chemical has $1 billion in defined benefit and $1.1 billion in defined contribution assets.

    Defined contribution plans had 70% of assets in equities in 2000; down from 72% in 1999; defined benefit plans had 60% in equities, down from 64% in 1999, according to the survey.

    The survey also showed 81% of defined benefit assets were actively managed, compared with just 42% of defined contribution assets. One reason: Defined contributions plans invest in two types of "passive" investments that defined benefit plans do not: stable value funds and employer stock, said Mr. McNiff. Some 14% of defined contribution plans were invested in stable value in 2000 and 36% in employer stock, Mr. McNiff noted.

    Also, 17% of defined benefit plan and 16% of defined contribution plan assets were managed internally in 2000.

    Ebbs and flows

    Defined benefit plans paid out 18% more in benefits compared with defined contribution plans, according to the CIEBA survey.

    "Because we're long-term investors and have longer term liabilities, we understand that there're going to be ebbs and flows in the cash flow," said Mr. Egizi.

    Benefit payouts from defined benefit plans held steady for the sixth consecutive year, representing about 6% of year-end assets, the survey said, and exceeding defined benefit contributions.

    On the defined contribution side, benefit payments exceeded contributions for the sixth straight year and represented about 9% of assets. Plan contributions averaged about $6,000 per active employee, with 30% of total assets provided in the employer match.

    Mr. Egizi said the combination of benefit payments and down markets is not a concern from a cash flow standpoint for most of the plan sponsor members of CIEBA, which comprises 115 corporate plan sponsors with $1.3 trillion in plan assets. Of the $1.3 trillion, $884 billion is in defined benefit plans and $509 billion in defined contribution plans. Some 99% of CIEBA's members have defined benefit and defined contribution plans.

    Defined benefit plans had 74% more participants than defined contribution plans, but defined contribution participant rates continue to climb.

    Participation by eligible employees increased to 85%, up slightly from 1999 and seven percentage points from 1996.

    From an investment management standpoint, Mr. Egizi said, the shift in the market provides an opportunity for plan sponsors to rebalance their defined benefit plans within set asset allocation ranges.

    On the defined contribution side, the setback in 2000 is not "tremendously significant," said Mr. McNiff, and it has not triggered huge changes in plan participants' investment postures.

    "If the market continues to be difficult, it'll provide an educational opportunity for people," added Mr. McNiff, and it will be a good test of how successfully assimilated the notion of long-term investing has become with plan participants.

    Degree of education

    Toward that end, the survey shows 80% of plan sponsors provide some form of investment education. The survey also shows increasing use of the Internet, with 86% of plan sponsors using the web to communicate with participants in 2000, up from 66% in 1999.

    Just 30% of plan sponsors make financial planning available to individual plan participants, and 21% provide an interactive software advisory program.

    Judy Schub, managing director of pension and investment policy at CIEBA, said the investment advice numbers are lower because plan sponsors are concerned with liability issues. If legislation were adopted that provided more comfort for plan sponsors from a liability standpoint, she suspects the investment advice percentages would increase.

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