The falling stock market bled more than $300 billion from the 1,000 largest retirement plans since Sept. 30.
Defined benefit plans of these sponsors said goodbye to $208 billion and defined contribution plans, $98 billion.
That's a 6.5% drop overall, to $4.79 trillion combined assets as of June 30, a 6% drop among the top 1,000 sponsors' defined benefit plans and an 8% drop among their defined contribution plans.
Defined contribution plans were hit hardest because they had the most money in equities.
According to Pensions & Investment's annual plan sponsor survey, 56.9% of defined benefit plan assets were in stocks, while 61.7% of defined contribution plan assets were in equities, as of Sept. 30, 2001. The defined benefit holdings comprised 44% domestic and 12.9% international stocks. While P&I does not track the split between domestic and international holdings on the defined contribution side, domestic stocks make up the overwhelming majority of the investments.
"That differential (between DB and DC plans) could mean all the difference in the world," said Kevin Quirk, a partner in Casey, Quirk & Acito, Darien, Conn. "They (defined contribution plan participants) are going to feel the downtrend of the market more dramatically than participants in defined benefit plans."
He added that defined contribution plan participants "reallocate at the wrong time." Instead of doing it systematically, he pointed out, they do it when the stock market is down the most.
Mr. Quirk pointed out that "in many cases people allocated more than a reasonable allocation to company stock. They will feel the downtrend of the market more dramatically than defined benefit plan members."
"If people are close to retirement and have a lot of money in company stock, their assets may be down substantially," said Jeff Nipp, director of research at Watson Wyatt Worldwide, Atlanta.
But the asset loss won't be any easier to swallow for defined benefit plans. "There will be a lot of unfunded pension liabilities that will become more apparent quickly," said Mr. Quirk. "That's a substantial part of a plan to lose over a short period of time."
"A lot of companies have not had to make contributions to their defined benefit plans - they will have to unless the markets turn around soon," Mr. Quirk added.
"It's a vicious cycle - stock prices are down and earnings are down, so it will be even more painful for companies to make contributions to their defined benefit plans," said Dev Clifford, a partner in consultant Greenwich Associates, Greenwich, Conn.
"Contributions are here to stay - that's the reality we're living in," said John Osborn, a senior consultant with Frank Russell Co., Tacoma, Wash.
"There will be increasing liability and benefit payments required for older defined benefit funds," said Ron Peyton, president and chief executive officer of Callan Associates, San Francisco.
"They (corporations) can no longer carry (pension plan) funding on the back of investment returns."
"To what extent defined benefit plan sponsors are rebalancing" is also an important issue as the stock market has declined, said Mr. Nipp. "They should be increasing their equity allocations. If they were at their target some time ago, they're below it now."
"Pension funds should be rebalancing. If they were faithful to long-term policy, they should stick to it in bad times as well as good times,' said Sandy Chotai, a consultant with Towers Perrin, Parsippany, N.J.
Mr. Chotai said now is the time for plan sponsors to "look at funding policy, benefits policy, accounting policy and investment policy in an integrated way."
He said defined benefit plans should lengthen their bond durations "so bonds will move in the same way as their liabilities." He explained that the bond portion of a fund's assets will move up and serve as a hedge to liability growth.
Mr. Chotai said defined benefit plan sponsors also should pay attention to accounting standards and make sure they do a five-year smoothing of assets, which will lessen the blow from asset declines.
Mr. Quirk thinks more companies may look for a "hybrid" type of pension fund - possibly cash balance plans or a cross between a defined benefit and a 401(k) plan nicknamed the DB/K - to protect their employees from the losses of defined contribution plans, while not expanding defined benefit plans.
"Cash balance plans combine the features of defined benefit plans, with the portability of defined contribution plans," he explained.
Larry Sher, director of research at Buck Consultants, New York, . "Cash balance plans could represent a potential bridge between the two systems," he said.
Alternative asset classes will also get more attention, consultants noted.
"At any point when you have stress in the system a lot of people are going to think about alternative asset classes," said Tim Barron, director of research at CRA Rogers Casey, Darien. "They're trying to find other ways to diversify their asset mix without hurting their return."
He believes many plan sponsors will think about redoing their asset allocation structure in view of the changes in the investment markets.