Monday, March 14, 2016

Suppose You Didn't Have to Ask All the Right Pension Questions

Think about it. Oftentimes, your consulting services are only as good as the questions you knew to ask. Suppose you didn't have to ask them.

I think back to some of my earlier days as a consultant. Leaving a meeting, one of my mentors said to me that I had answered all of the client's questions that they needed to have answered, but didn't know it. In other words, I delivered optimal consulting to my client.

In the actuarial consulting world, what plan sponsors are frequently encountering is something short of optimal consulting. We can refer to it as suboptimal consulting.

I'm not going to give away exactly what goes into suboptimal consulting. What I will do though is to tell you a little bit about it, how damaging it might be to not avoid it, that it can be identified, and what a better solution looks like.

To paraphrase the old TV show "Dragnet" -- the tales of suboptimal consulting you are about to encounter are true; the names have been changed to protect the innocent. And, by the way, the innocent are the clients. They have businesses to run. With the exception of those big enough to have full-time, in-house pension consultants, they can't be expected to know all this stuff on their own.

Surprisingly enough, National Widget Company (NWC) is in the business of manufacturing and distributing widgets. NWC currently sponsors two frozen pension plans. Their actuarial firm, Too Big For the Mid-Market (TBFM) has assigned a litany of what it views internally as mediocre consultants to NWC for the last 15 years or so. Here is some of what we know about this relationship.

  • There have actually been six separate Enrolled Actuaries from TBFM assigned to NWC over the last 15 years. Only one of the six has ever met NWC management. None has worried about learning NWC's corporate goals, needs, or points of pain. All simply assumed that NWC was pretty much the same as the rest of TBFM's clients.
  • The two NWC pension plans, in total, have about $100 million in plan assets.
  • NWC pays TBFM about $250 thousand per year in actuarial fees.
  • NWC has been laying out an average of slightly more than $100 thousand in cash every year (either to the plan or on behalf of the plan) that it didn't need to and for which there is no real benefit to the company or to plan participants. This is wasted money that could have been saved.
How do I know all of this? Suboptimal actuarial consulting can be identified. Deficiencies can be pointed out. Solutions can be found going forward. No, we can't turn back time, but we could ensure that NWC doesn't make the same mistakes over and over again. 

That NWC sponsors two frozen pension plans implies to me that they would like to terminate them. In other words, they'd like to get out of the pension business. Currently, however, there is no path to those plan terminations. They live in a world of hope and despair. That is, their strategy is that they hope that everything will go right and that these pension plans go away yet they are faced with the despair of knowing that this is not very likely to happen. 

Suppose NWC had a real strategy. Suppose that strategy included solutions with more upside potential and with less downside risk. Suppose every dollar that NWC spent on the plan was optimal. Suppose someone answered NWC's questions that their lack of pension expertise made them unequipped to ask. 

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