Underfunding doesn’t happen because markets are “bad.” It happens because the plan design fails to absorb how markets actually behave.
Traditional Fixed Interest Crediting (FIC) creates a rigid liability structure that keeps growing—regardless of whether assets keep up.
Here are the three primary drivers.
1. Asset Returns Fall Short of the Fixed Crediting Rate
In an FIC plan, participants are credited a fixed rate (typically 4–5%) every year—no matter what the market does.
When actual returns lag:
- Assets grow slower (or decline)
- Liabilities continue compounding at the fixed rate
- The funding gap widens quickly
This is how underfunding accelerates especially in volatile or down markets.
2. No Shock Absorber Between Market Performance and Liabilities
FIC has no mechanism to adjust when markets underperform.
Without Market Return Crediting:
- Losses stay on the asset side
- Liabilities keep rising unchanged
- There is no automatic rebalancing of funding status
You’re forcing the plan sponsor to absorb all the volatility through future contributions.
3. Reactive Contributions Instead of Structural Alignment
Most underfunded plans don’t start that way—they drift there.
Common pattern:
- Contributions are set based on prior assumptions
- Market downturn hits
- Required contributions spike (often unexpectedly)
This creates:
- Contribution volatility
- Potential excise taxes for missed funding targets
- Forced “true-up” payments under IRC Section 430
Without alignment, funding becomes reactive instead of controlled.
The Real Diagnosis
Underfunding is not primarily a return issue—it’s a design failure.
When:
- Liabilities grow at a fixed rate
- Assets move with the market
- Contributions lag reality
…the outcome is predictable.
MRC corrects this by linking liability growth to actual asset performance—reducing the structural mismatch.
Bottom Line
If your plan is underfunded, it’s not because the market failed it’s because the design couldn’t adapt.
Call to Action
Before your next valuation or AFTAP certification, run a Cash Balance Funding Risk Review.
You’ll get:
- A precise view of your funding gap
- Forward-looking contribution requirements
- A redesign strategy using MRC
Because once underfunding triggers restrictions, you’re no longer optimizing—you’re catching up.
Additional Considerations
Fixed Interest Crediting May Be More Appropriate When:
- Short-duration plans that are approaching termination
- Sponsors with very low risk tolerance or preference for contribution smoothing via fixed assumptions
- Situations where administrative simplicity outweighs funding efficience
Limitations/Risks for Market Return Crediting:
- Increased variability in credited interest year-to-year
- Need for proper investment alignment and fiduciary oversight
- Potential communication complexity with participants
This is our interpretation of this data and is for illustrative purposes only and is not indicative of future performance. This content is provided for educational purposes only and should not be construed as specific recommendations or investment advice. The scenarios outlined are intended to be illustrative of one outcome of different crediting strategies, and your specific situation can and will vary. Always consult with your investment professional before making important investment decisions.