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Clear win from a mixed blessing

The Republican tax reform law apparently has inspired defined benefit plan sponsors to make significant contributions to their plans, but it might be a mixed blessing for the private retirement system.

As reported in Pensions & Investments, companies announced contributions totaling nearly $9.6 billion to the plans in the first two weeks of February, and that is in addition to the $17.7 billion in announced contributions of more than $100 million each reported in the Feb. 5 issue. In the week of Feb. 19, several other companies announced contribution plans including Pfizer, American Airlines and United Continental.

These announcements show that companies see 2018 as an opportunity to lift the level of funding in their plans. They might be accelerating their pension fund contributions to reap the benefits of getting the tax deduction for the contributions at the higher rate. A contribution made when the tax rate is 35% is worth more than the same contribution made when the tax rate is 21%.

They also might be using some of the money the tax cut saves them for the contributions, and those companies repatriating money that has been held overseas because of the previous high tax rates they would have paid on repatriated money might be using some of that money. U.S. companies are estimated to hold between $1 trillion and $2.5 trillion overseas, and many already have announced plans to bring it home.

Companies making the contributions might also be seeking to increase the funded levels of their plans to head off Pension Benefit Guaranty Corp. variable premium increases. In 2017 most plan sponsors were paying 3.4% on any deficit, according to Michael Moran, senior pension strategist at Goldman Sachs Asset Management. That will rise to 3.8% in 2018, and more than 4% a few years later.

Increasing contributions now could reduce those premiums and might eliminate them for some companies.

Whatever the motives, the result will be better funded, more financially stable pension plans, meaning the promised benefits for employees are more secure in the companies that keep their DB plans. The unfortunate side of better funded plans is that some companies might be tempted to freeze them and buy annuities from insurance companies for the participants. That would mean no pension increases in the future for the employees.

Companies that freeze or terminate their plans likely will replace them with 401(k) plans, a development that places most of the responsibility for saving for retirement, and all the investment risk, on the employees.

Companies that already have frozen or terminated their defined benefit plans and replaced them with 401(k) or other defined contribution plans should use some of the money corporate tax reform has saved them to increase, or initiate, a match of employees' contributions.

Many companies already have announced one-time bonuses and some 401(k) contributions for employees — in addition to stock buybacks and other measures — as they share the benefits of the tax reform. But the benefits of the tax reform law for corporations will go on until repealed by a future Congress. Using some of the money for a bigger match of employee contributions to the 401(k) plan could likewise continue until that repeal — that is for at least several years. Increasing the match would make the future retirements of 401(k) plan participants more secure, especially if it encourages employees to step up their own saving.

Giving employees one-time bonuses might give the economy a short-term boost, but increasing company contributions to their 401(k) plans increases savings and eventually will provide funds for companies that need it for capital investment. This would strengthen the economy for the long run.

It could turn the tax reform law from a mixed blessing for the private retirement system into a clear win.