Evaluate a private DB plan's risk profile in light of five factors: how well funded it is, the sponsor's financial strength, how the sponsor's business interacts with plan assets, plan design and the characteristics of the workforce
The idea
Five influences shape how much risk a DB plan can take. A higher funded status (assets ÷ liabilities) gives a cushion for risk; an underfunded plan needs contributions and more hedging. A strong, profitable sponsor with low debt can absorb shortfalls and make contributions, increasing risk tolerance. Correlation between the sponsor's operating results and plan assets matters: if poor markets hit both, contributions are needed exactly when the sponsor is weakest, so the plan should avoid assets correlated with the sponsor's business. Plan design features such as early retirement or lump-sum options add liquidity needs and shorten the horizon. An older workforce or high ratio of retirees to active workers shortens duration and raises liquidity needs.
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