Bottom Line Up Front

• When auditing pension and OPEB valuations under GASB standards, census testing is one of the most effective and practical ways to evaluate the accuracy of a valuation without becoming an actuary yourself.
• Auditors should focus their review on high-impact census data fields such as birth dates, hire dates, Medicare eligibility, benefit eligibility, compensation (for pension plans) and special employee populations like public safety personnel and teachers.
• A risk-based, materiality-driven approach to census testing can help auditors identify potential issues, perform meaningful audit procedures, and gain confidence in pension and OPEB valuation results.

AUDITING THE ACTUARY: WHERE SHOULD YOU FOCUS?

GASB standards for pension and OPEB valuations have placed an increased burden on the audit community to “audit the actuary.” What exactly that means remains somewhat ambiguous. It seems obvious that auditors should not need to become actuaries themselves to understand every aspect of an actuarial valuation. Yet auditors must perform procedures sufficient to demonstrate that the valuation has been appropriately reviewed.

Two of the most productive and reasonable areas to focus on are:

• Census testing
• Reviewing actuarial assumptions

This article focuses on census testing and the practical steps auditors can take to perform an effective review.

Prefer video? Watch our Ask an Actuary discussion on census testing and what auditors should focus on when reviewing pension and OPEB valuations under GASB standards.

Step 1: Understand the Census Fields

Actuaries often use specialized software that requires specific data fields, and they may create additional fields for valuation purposes. While many fields are self-explanatory, such as birth date or higher date, others might not be.

If there are fields on the census file that you don’t understand, it is entirely reasonable to ask the actuary what they represent and how they are used in the valuation process. Understanding the purpose of each field is the first step toward performing an effective review.

Step 2: Verify that the population makes sense

Before reviewing individual records, step back and consider the census population as a whole.

A lot can happen during the process of gathering and consolidating data. For example:

• A department’s census file may have been omitted.
• Employees who are not benefit-eligible may have been included.
• Certain groups or departments, such as retirees or teachers, may have been unintentionally excluded.

Reviewing overall employee and retiree counts can help identify these types of issues before they materially affect valuation results.

STEP 3: PAY SPECIAL ATTENTION TO PUBLIC SAFETY AND TEACHER POPULATIONS

Many retirement systems provide different retirement eligibility provisions for designated public safety personnel (pro tip: it’s not just police & fire. As an example, lineman at Light Departments are easy to miss). As a result, failure to properly identify public safety status may materially understate liabilities and service cost. Verifying that these populations have been properly identified can be an important audit procedure.

Teachers also warrant special attention. Although the impact is generally less pronounced than for public safety employees, teachers often have different mortality, termination, and retirement assumptions than other employees, which can materially affect liabilities.

For employers with municipal utility districts or similar organizations, it may also be worth reviewing whether employees eligible for public safety retirement benefits have been properly coded.

Looking for an OPEB-specific checklist? We got you! 9 Things to Review for Your OPEB Census Audit

THE MOST IMPORTANT CENSUS ELEMENTS TO REVIEW

Birth Date

Birth date is one of the most important components of any pension or OPEB valuation because age directly impacts liabilities.

For active employees, incorrect birth dates may understate liabilities if employees are older than reported. For retirees and covered spouses, younger ages generally produce higher liabilities.

It is often worthwhile to select five to ten active and retired participants and verify that the dates on the census file agree with supporting records.

Spouse Birth Date

For retirees with covered spouses, spouse age can materially affect liabilities.

When actual spouse dates of birth are unavailable, actuaries frequently rely on assumptions such as assuming male spouses are three years older than female spouses or that same-sex spouses are the same age. While these assumptions are reasonable, actual spouse dates of birth are preferable and can materially affect results when spouses are significantly younger.

Hire Date

Hire date is another critical census element because many pension and OPEB plans require minimum years of service before employees become eligible for benefits.

If prior credited service is omitted, liabilities may be understated. Conversely, if an employer uses a more recent date due to promotions, transfers, or position changes, employees may incorrectly appear ineligible for benefits.

A common issue occurs when employers update hire dates whenever an employee changes positions or departments. From an actuarial perspective, the relevant date is generally the employee’s original hire date as benefits are earned/accrued over the entire working lifetime. This normally should align with the date recognized under the pension system.

Medicare Eligibility

Medicare eligibility status has a significant impact on OPEB liabilities.

Retirees who remain enrolled in active healthcare plans after age 65 often have liabilities that are three to four times higher than retirees enrolled in Medicare supplement plans. Therefore, if retirees over age 65 remain coded as participants in active plans, it is worth verifying that the information is correct.

Employers may also identify employees who are expected to be ineligible for Medicare at age 65, such as certain teachers hired before March 1986. However, these cases can be difficult to verify because individuals may have earned Medicare credits through other employment.

Medical Coverage Level for OPEB Plans

For retirees, the level of medical coverage elected can materially affect liabilities.

In particular, whether a retiree has covered dependents or a covered spouse can significantly change projected healthcare costs and should be verified when possible.

Compensation (mainly for Pension Plans)

While not generally important for OPEB plans (there are some pay based life insurance benefits), the large majority of public sector pension plans have pay related benefits (often a final three or five year average). So, it’s important to validate the pay is correct and also that the pay provided matches the plan’s compensation definition (e.g., should bonuses, overtime, and certain other pay types be included or excluded).

Form of Payment for Pension Plans

While we care about “coverage level” for OPEB plans, a key data element for retirees in pension plans is the form of payment (e.g., life annuity, joint & survivor, certain & life, cash refund, etc.). This along with the spouse birth date noted earlier can have a material impact on the pension liability for a retiree.

Benefit Eligibility

Some employers provide census files that include all employees, including those who are not eligible for retiree benefits.

Failure to identify employees who are not benefit eligible can result in overstated liabilities. Therefore, auditors should confirm that only employees eligible for benefits are included in the valuation population.

REMEMBER: IT’S ABOUT MATERIALITY

As with any audit procedure, materiality should guide your review.

Birth dates that differ by a few days, months, or even years may not materially impact liabilities. However, if errors appear to be systemic, they should be investigated further.

Similarly, the size of the employer and the census population will influence whether a particular anomaly is material.

If questions arise regarding the impact of a census issue, auditors should consult with the actuary to determine the size of the issue, its materiality, and whether a revised valuation report may be necessary.

FINAL THOUGHTS

Auditors should not be expected to become actuaries in order to review pension and OPEB valuations. However, performing thoughtful census testing is one of the most effective ways to gain confidence in valuation results and satisfy audit requirements under GASB standards.

By understanding the census data, verifying key demographic information, reviewing special employee populations, and focusing on material items, auditors can perform meaningful procedures without becoming valuation experts themselves.

If you have questions regarding a particular census issue or would like to discuss best practices for pension and OPEB census testing, the actuarial team at Odyssey Advisors is always happy to help.

Frequently Asked Questions

What is census testing in a pension or OPEB audit?
Census testing is the process of verifying the accuracy and completeness of participant data used in an actuarial valuation. Auditors review key demographic and eligibility information to gain confidence that pension and OPEB liabilities are reasonably stated under GASB standards.

Why is census testing important when auditing an actuarial valuation?
Actuarial valuations rely heavily on participant data. Errors in birth dates, hire dates, benefit eligibility, Medicare status, or employee classifications can materially impact reported pension and OPEB liabilities, making census testing a critical audit procedure.

What census data fields should auditors review?
The most important fields typically include:

• Birth date
• Hire date
• Benefit eligible status
• Medicare eligibility
• Spouse date of birth
• Medical coverage level
• Compensation (mainly for pension plans)
• Form of payment (the retiree’s benefit options for pension plans)
• Employee classification (such as public safety or teacher status)

How many records should auditors test during census testing? There is no universal number. Sample sizes should be determined based on the size of the population, audit materiality, risk assessment, and applicable audit standards.

What should auditors do if they identify census errors? Auditors should discuss the issue with the actuary to determine the impact on liabilities, evaluate materiality, and determine whether additional testing or a revised actuarial valuation may be necessary.

What documentation should auditors use to verify census data?
Auditors should compare census data to reliable source documentation, such as payroll records, personnel files, benefit enrollment records, retirement system records, or other supporting documentation maintained by the employer. The appropriate source will depend on the data field being tested.

The post Census Testing Audits: What Auditors Should Review Under GASB Standards appeared first on Odyssey Advisors, Inc.

Bottom Line Up Front

• You can contribute to both a SIMPLE IRA and a 401(k) in the same year, but your employee salary-deferral limit is shared across both plans — for 2026, that combined cap is $24,500, not two separate maximums. 
• Business owners cannot simply run both plans side by side — to switch from a SIMPLE IRA to a 401(k), the SIMPLE IRA must be terminated, either at year-end or mid-year under SECURE 2.0’s safe harbor 401(k) replacement rules. 
• A mid-year switch comes with a prorated deferral limit, meaning if you’ve already contributed heavily to the SIMPLE IRA, your remaining 401(k) employee deferral room for that year will be reduced — though employer contributions can help close the gap toward the $72,000 annual additions limit. 

Yes, you can contribute to a SIMPLE IRA and a 401(k) in the same year if you are eligible for both plans, such as when you change jobs, work for two unrelated employers, or have a job plus self-employment income. But there’s a catch: your employee salary-deferral limit is shared across both plans. You do not get to contribute to the full SIMPLE IRA employee limit and the full 401(k) employee limit separately. 

For 2026, the general employee deferral limit for a traditional or safe harbor 401(k) is $24,500, and the general SIMPLE IRA salary-reduction limit is $17,000. The IRS states that if you participate in a SIMPLE IRA and another employer plan in the same year, the total salary-reduction contributions you make across all such plans are limited to $24,500 for 2026, before any applicable catch-up contributions. 

Can a Business Owner Switch from a SIMPLE IRA to a 401(k) and Contribute in the Same Year?

For many small business owners, a SIMPLE IRA is a good starter retirement plan. It is relatively easy to set up, inexpensive to operate, and generally does not require the employer to file an annual Form 5500. But once your business is profitable enough that you want to contribute much more for yourself, the SIMPLE IRA can start to feel limiting. The 401(k), especially when paired with employer profit-sharing contributions, can offer a much higher ceiling. 

For 2026, the annual 401(k) employee elective deferral limit is $24,500, while the total annual additions limit for a 401(k) or profit-sharing plan is $72,000, not counting catch-up contributions. By comparison, the general SIMPLE IRA employee salary-reduction limit is $17,000 for 2026, with required employer contribution typically limited to a 3% match or a 2% nonelective contribution formula. 

So, can you contribute to a SIMPLE IRA and a 401(k) in the same year if you own the business  and want to switch plans? The answer is: sometimes, but not by simply running both plans side by side. 

The key point to make the switch from a SIMPLE IRA to a 401(k) is that the 401(k) must replace the SIMPLE IRA, you cannot simply add a 401(k) on top of an existing SIMPLE IRA. 

How Do You Switch from a SIMPLE IRA to a 401(k)? 

There are two practical ways to move from a SIMPLE IRA to a 401(k): 

The first is the clean year-end switch. You discontinue the SIMPLE IRA effective January 1 and start the 401(k) for the new plan year. The IRS says that, for a standard SIMPLE IRA termination, you notify employees before November 2 that the SIMPLE IRA will be discontinued effective the following January 1, notify the financial institution and payroll provider, and keep records of your actions. 

But let’s say you add a few big customers, and you want to start getting the bigger tax deduction this year. The second option is a mid-year replacement. Under SECURE 2.0 for plan years beginning after 2023, an employer can terminate a SIMPLE IRA during the year if it establishes and maintains a safe harbor 401(k) to replace it – it will require a 30 day notice vs the traditional 60 day notice for a January 1st plan change. In that case, the safe harbor 401(k) is treated as an exception to the normal rule that prevents an employer from maintaining both a SIMPLE IRA and another plan in the same calendar year. 

For a business owner whose main goal is to contribute the full $72,000 between employee and employer contributions, the cleanest planning route is usually to terminate the SIMPLE IRA at year-end and start the 401(k) on January 1. For some it may be worth the extra effort to make the switch immediately and take advantage of the added contributions and tax deductions a 401(k) offers. 

Want to Upgrade Your SIMPLE IRA to a 401(k) Plan in 2026?

What Happens if You Switch from a SIMPLE IRA to a 401(k) Mid-Year?

A mid-year switch is possible, but it is not as simple as saying, “I contributed to the SIMPLE IRA for part of the year, now I’ll contribute the full 401(k) maximum.” 

When a SIMPLE IRA is replaced mid-year by a safe harbor 401(k), the IRS requires the employee deferral limit for the transition year to be calculated using a weighted formula. The formula prorates the SIMPLE IRA limit for the part of the year the SIMPLE IRA was in effect, prorates the 401(k) limit for the part of the year the safe harbor 401(k) was in effect, and then subtracts any SIMPLE IRA salary-reduction contributions already made that year.

For example, assume the SIMPLE IRA is in place from January 1 through June 30, 2026, and the safe harbor 401(k) starts July 1. Ignoring catch-up contributions, the weighted employee deferral limit would be approximately:

This creates a combined transition-year deferral limit of about $20,781, minus whatever you already deferred into the SIMPLE IRA.

If you had already deferred the full $17,000 into the SIMPLE IRA before the switch, your remaining employee deferral room for the 401(k) would be only about $3,781 in this example.

That does not necessarily mean the $72,000 goal is impossible, but it does mean the employee-deferral portion may be smaller, and more of the contribution would need to come from the employer side if allowed. In addition, a mid-year 401(k) can create short-plan-year or short-limitation-year issues, and the IRS notes that the Section 415 annual additions limit may need to be prorated in a short limitation year depending on how the plan is drafted.

Key Takeaways: Moving a SIMPLE IRA to a 401(k)

Switching from a SIMPLE IRA to a 401(k) can be an effective way for business owners to increase retirement contributions and potentially generate larger tax deductions. However, the transition must be handled carefully. In most cases, you cannot simply add a 401(k) on top of an existing SIMPLE IRA without first terminating or replacing the SIMPLE IRA according to IRS rules. 

While a 401(k) generally involves more administration and recordkeeping than a SIMPLE IRA, the increased contribution flexibility may make the additional complexity worthwhile. If you’re considering making the switch, it’s important to coordinate with your retirement plan advisor, TPA, payroll provider, and tax professional to ensure the transition is completed correctly and to maximize available contribution opportunities. 

Frequently Asked Questions

Can I max out both a SIMPLE IRA and a 401(k) in the same year?
No. The employee salary-deferral limit is generally shared across both plans, so you cannot contribute the full employee maximum to each separately.

Can I have a SIMPLE IRA and a 401(k) at the same time?
Generally, an employer cannot maintain both plans simultaneously unless a specific exception applies, such as the SECURE 2.0 mid-year replacement rules.

Is it worth switching from a SIMPLE IRA to a 401(k)?
For many growing businesses, a 401(k) provides significantly higher contribution opportunities and greater plan design flexibility, though it comes with additional administrative responsibilities.

The post Can I Contribute to a SIMPLE IRA and 401(k) in the Same Year? appeared first on Odyssey Advisors, Inc.

Bottom Line Up Front

• Even when retirees appear to pay the “full premium,” governments may still be providing a hidden OPEB subsidy through blended healthcare rates. 
• GASB 75 and ASOP 6 require actuaries to measure retiree healthcare costs using age-adjusted claims closets rather than blended premiums, which can significantly increase reported OPEB liabilities. 
• Ignoring implicit cost can materially understate a government’s OPEB liability, annual expense, and long-term financial obligation, creating audit, funding, and credit rating risks. 

When an employer provides retiree health benefits, the actual cost of those benefits typically varies by age. Older retirees generally use more healthcare and cost more to cover. If the employer charges all retirees (and often active employees) the same “blended” premium regardless of age, something subtle happens: the younger, healthier members of the group are subsidizing the older, higher-cost members.

Under Governmental Accounting Standards Board Statement No. 75 (GASB 75), and the actuarial guidance in ASOP 6,  this subsidy is not considered free. It has a real economic cost to the employer that must be measured and disclosed. That hidden cost is known as the implicit rate subsidy, often referred to simply as the implicit cost. 

What is the Implicit Rate Subsidy?

Here’s how it works in practice.

The actuary calculates what it would charge each age group if they were priced separately using age-adjusted or experience-rate costs. For example, a 62-year-old retiree might actually cost $1,800 per month to insure. However, the employer may only charge the retiree the same blended premium charged to everyone else – let’s say $900 per month. 

The retiree is therefore paying far less than their actual cost. The employer is absorbing the difference, even if it never writes a check to the retiree directly. GASB 75 requires actuaries to recognize this gap as part of the OPEB liability.

ASOP 6 reinforces this by directing actuaries to use age-adjusted costs when projecting future benefits, rather than simply projecting the blended rate. This ensures that the subsidy embedded within the premium structure is not overlooked. 

For a broader overview of implicit subsidies in OPEB plans, read our article here: Implicit Subsidies in OPEB Plans

A Simple Illustration

The graphic below shows how an employer can be providing a significant OPEB subsidy even if it believes retirees are paying “the going rate”. 

The active employee overpays relative to their age-adjusted cost, while the retiree underpays relative to theirs. The employer silently absorbs the gap between the two. That gap is the implicit cost, and both GASB 75 and ASOP 6 require it to be measured and
disclosed rather than buried in the blended premium. 

How GASB 75 Measures the Implicit Cost

GASB 75 measures the implicit costs through a specific actuarial process. At its core, the standard requires OPEB liabilities to be measured using the “entry age” actuarial cost method and mandates that the per capita claims costs used in the valuation be age-adjusted – not simply the blended premiums charged by the employer.

1. Determine age-adjusted per capita costs 

Following ASOP 6 guidance, the actuary develops what it would actually cost to provide healthcare for each age cohort separately. These costs are typically derived from insurance carrier data, published age-adjustment factors, or plan experience. 

For example, a 64-year-old retiree may have an expected healthcare cost of $1800 per month, while a 45-year-old active employee costs $450 per month, even if both individuals are charged the same $900 blended premium. 

2. Project those costs forward

The age-adjusted costs are then projected forward using healthcare trend rates, which reflect expected medical inflation over time. GASB 75 requires explicit healthcare trend assumptions, and those assumptions may differ by category of expense such as hospital services, physician services, or prescription drugs. 

3. Calculate the Total OPEB Liability (TOL)

Using the entry age method, the actuary attributes the projected value of each employee’s future benefits across their working career as either a level percentage of pay or level dollar amount. 

This produces the Total OPEB Liability (TOL), which represents the  present value of all benefits earned to date. The liability is discounted at either: 

• the expected long-term investment return for funded plans, or
• a municipal bond index rate for unfunded plans.

4. Where the Implicit Cost Appears: 

The implicit cost becomes visible when age-adjusted costs are used instead of the blended premium structure. Because retiree healthcare costs are significantly higher than the blended premiums often charged to retirees, the projected future benefit payments become materially larger than a simple “project the premium” approach would suggest. That increase in projected future costs directly increases the TOL.

In other words, the increase in the TOL resulting from age-adjusted costs is the recognition of the implicit subsidy embedded within the premium structure. 

5. Required Financial Statement Disclosure

GASB 75 requires governments to report:

• The Total OPEB Liability (TOL), 
• The Net OPEB Liability (TOL minus any plan assets), and 
• Related deferred inflows/outflows 

Directly on the face of the financial statements rather than solely in the footnotes, as was common under GASB 45. 

This makes the implicit cost visible to bondholders, taxpayers, and oversight bodies in a way it previously was not. 

Why Many Governments Were Surprised

Many governments believed they had relatively small OPEB obligations because retirees were paying what appeared to be their “fair share” of premiums. 

However, GASB 75’s age-adjusted measurement framework reveals that the blended premium structure itself is a form of benefit with a measurable and potentially very large present value. Because of that, many governments were surprised by how much their OPEB liabilities grew when they adopted GASB 75. 

What Happens If the Implicit Cost Is Ignored?

When the implicit cost is ignored, the OPEB liability is systematically understated. However, the consequences ripple further than just a number on a balance sheet.

The Direct Measurement Error

If an actuary projects the blended premium instead of age-adjusted costs, the assumed retiree healthcare cost is understated. Since the Total OPEB Liability represents the present value of projected future benefits, understating the per-retiree cost directly understates the liability itself. 

For plans with large retiree populations or long post-retirement coverage periods, the understatement can be substantial — often ranging from 20% to 50% depending on the demographics of the group. 

The Downstream Financial Impact 

The understatement doesn’t stay isolated. It cascades through several related figures. 

The Net OPEB Liability (TOL minus plan assets) is understated by the same amount, making the government’s balance sheet look stronger than it truly is.

Annual OPEB expense is also too low, because the service cost component (the portion earned by employees during the current year) is calculated using the same flawed per capita assumptions. This means operating results are overstated year after year.

For governments that prefund OPEB obligations, actuarial contribution calculations may also be insufficient, leading to chronic underfunding that compounds over time as the retiree population ages and the true costs eventually become unavoidable.

The Long-Term Fiscal Impact 

The implicit subsidy generally grows as: 

• More employees retire, 
• Retirees live longer, and 
• Healthcare costs continue rising faster than general inflation.

Ignoring the subsidy therefore creates more than a one-time error. The gap between the reported liability and the true liability widens each valuation cycle. 

When the issue is eventually corrected – whether through an actuarial assumption update, auditor review, or change in methodology – the liability can spike dramatically in a single year, creating a fiscal shock that is much harder to manage than gradual recognition would have been. 

Audit and Compliance Risk

GASB 75 is explicit that age-adjusted costs must be used in measuring OPEB obligations. 

Auditors reviewing OPEB disclosures are expected to evaluate whether the actuary’s per capita claims cost development complies with ASOP 6 guidance. If blended rates are used without appropriate justification, the financial statements may be materially misstated. 

This can expose governments to: 

• Audit findings, 
• Restatements, and 
• Reputational concerns with bond rating agencies. 

The Rating Agency Dimension

Credit rating agencies such as Moody’s, S&P global ratings, and Fitch Ratings all incorporate OPEB liabilities into their analysis of government creditworthiness. 

An understated OPEB liability can mask fiscal stress that rating analysts may identify independently through their own adjustments and modeling. 

Governments that understate their OPEB obligations do not necessarily fool the market – they just make their disclosures less credible. 

Why Implicit Cost Matters

Ignoring implicit cost is not a conservative accounting choice, it’s an error that defers recognition of a real obligation. 

The cost of providing healthcare to an aging retiree population does not disappear simply because the premium structure obscures it. GASB 75 exists precisely to prevent governments from treating a hidden subsidy as if it were not subsidy at all. 

Additional Resources 

For readers looking for a deeper technical discussion of implicit rate subsidies in OPEB plans, the Society of Actuaries has published additional guidance and analysis here:

Accounting for the Implicit Rate Subsidy in OPEB Plans (SOA PDF) 

Related Reading

• Understanding Implicit Subsidies in OPEB Plans
• Difference between GASB 74 and GASB 75
• OPEB valuation services 

Understanding how implicit cost impacts your OPEB valuation is critical for accurate financial reporting under GASB 75. If your organization is evaluating retiree healthcare obligations, reviewing actuarial assumptions, or preparing for an upcoming valuation, Odyssey Advisors can help you better understand how these liabilities are being measured and disclosed. 

The post How GASB 75 Measures Implicit Cost in OPEB appeared first on Odyssey Advisors, Inc.

Bottom Line Up Front

• Defined Benefit (DB) plans are built around the outcome. You’re promising a set retirement benefit. Defined Contribution (DC) plans focus on what goes in, but the final result depends on investment performance. 
• The biggest difference comes down to who takes on the risk: DB plans place investment and longevity risks on the employer, while DC plans shift those primarily to the employee. 
• Choosing the right plan depends on your budget, workforce, and long-term goals (and in many cases, a combination of both might make the most sense).

When it comes to retirement plans, most employers—and employees—are working within one of two structures: defined benefit (DB) plans or defined contribution (DC) plans. 

Over the past several years, we’ve seen a clear shift. In the private sector, DC plans have become the standard, while DB plans remain more common in the public sector. According to the U.S. Bureau of Labor Statistics, only about 15% of private industry workers had access to a DB plan as of March 2023, compared to 67% with access to a DC plan.

But beyond the trends the real difference between these plans comes down to one core question: who is responsible for the outcome?

The Core Difference: Promise vs. Contribution 

At a high level, Defined Benefit plans promise a specific benefit at retirement, typically based on years of service and pay, with the employer responsible for funding that promise. Defined Contribution plans set the contribution amount upfront, but the retirement benefit depends on how much is saved and how investments perform. 

That distinction drives everything else: risk, funding, predictability, and even how employees experience their retirement plan over time. 

What is a Defined Benefit (DB) Plan?

A retirement plan that promises a specific benefit at retirement, typically based on a formula 

That formula usually includes: 

• Years of service 
• Final average compensation 
• A benefit multiplier

From the employee’s perspective, the biggest advantage is predictability. From the employer’s perspective, it comes with responsibility. 

The employer (or plan sponsor) is on the hook for funding the plan, managing investments, and making sure the promised benefit can actually be paid. Because of that, contributions can fluctuate depending on the market and actuarial assumptions, and ongoing actuarial valuations are required. 

You’ll most commonly see DB plans in the form of traditional pensions or cash balance plans, which are a more modern, hybrid version of the same concept. 

A Note on Modern DB Plans: Cash Balance Plans

While traditional pension formulas still exist, many employers today are adopting a more modern “hybrid” version of a defined benefit plan known as a Cash Balance Plan.

Cash Balance plans are still DB plans at their core, but they’re structured in a way that often feels more familiar to employees. Instead of a lifetime annuity being the focus, benefits are typically expressed as a growing account balance made up of: 

• Annual pay credits
• Interest credits

That design can make the plan easier to understand, while still allowing employers to offer significantly higher contribution levels, especially for business owners, than a standalone defined contribution plan. 

What is a Defined Contribution (DC) Plan?

A defined contribution (DC) plan takes a different approach. Instead of promising a future benefit, it defines the contributions going into the plan. 

The final outcome is driven by:

• Contributions
• Investment performance
• Fees

There’s no guaranteed income at retirement, which means the responsibility shifts more toward the employee. 

Participants are making investment decisions, managing their savings rate, and ultimately absorbing the impact of market ups and downs. 

Plans like 401(k)s, 403(b)s, and 457 plans fall into this category. They’re generally easier for employers to administer and offer more cost predictability, which is one of the main reasons they’ve become so widely adopted.

If you’re evaluating or redesigning a plan, this overview of 401(k) plan design walks through the key decisions that actually shape how the plan functions. 

Side-by-Side Comparison

While both types are built to support retirement, they do it in fundamentally different ways.

When Each Plan Type Makes Sense 

Defined benefit plans tend to align well with organizations that have a stable, long-tenured workforce and a desire to provide predictable retirement income. They can also be a powerful tool for high-income business owners looking to defer more for retirement, particularly when structured as cash balance plans. 

Defined contribution plans are often a better fit for organizations that want more control over annual costs or have a workforce that values flexibility and portability. They also tend to resonate with employees who prefer having direct control over how their retirement assets are invested. 

What to Consider Before Choosing a Plan

Choosing between a DB and DC plan isn’t just about how they work, but how they fit into your overall strategy.

A few things to think through: 

• Cost predictability vs. variability: DB plans can introduce year-to-year contribution swings, while DC plans are typically more stable.
• Risk allocation: DB plans place investment and longevity risk on the employer; DC plans shift that risk to employees. 
• Workforce dynamics: Long-tenured teams may value DB plans more, while mobile workforces often prefer DC plans. 
• Administrative complexity: DB plans require actuarial oversight and more governance; DC plans are generally simpler. 
• Long-term financial impact: DB plans create ongoing liabilities, while DC plans limit obligations to annual contributions. 

Can You Offer Both?

In many cases, this isn’t an either/or decision because defined benefit and defined contribution plans can be complimentary with many employers offering both. 

This structure can: 

• Allow business owners to contribute significantly more toward retirement
• Provide meaningful, competitive benefits for employees 
• Balance long-term retirement security with flexibility

Where to Go From Here

The right approach comes down to aligning your plan with your organization’s financial capacity, workforce needs, and long-term goals. Whether that’s a defined benefit plan, a defined contribution plan, or a mix of both, the goal is the same: creating a strategy that works in practice, not just on paper. 

If you’re thinking through what the right plan looks like for your organization, or whether a defined benefit, defined contribution, or hybrid approach makes the most sense, it’s worth having that conversation early. 

If you want a second set of eyes on your current plan or are exploring your options, we’re always happy to talk through it.

The post DB vs. DC Plans: Navigating the Strategic Tradeoffs appeared first on Odyssey Advisors, Inc.

Bottom Line Up Front

• Tight municipal budgets and rising pension costs have led some towns to consider Pension Obligation Bonds (POBs) as a funding strategy.
• POBs can improve a plan’s funded status and offer temporary budget relief if investment returns exceed borrowing costs, but that outcome depends heavily on market performance and timing.
• Significant risks remain: poor investment returns, added debt, and shifting costs to future taxpayers can leave municipalities in a worse financial position than before issuance

Many towns and cities today are operating under increasing fiscal pressure. Rising costs, slow revenue growth, and competing demands on limited resources have made it harder than ever to balance municipal budgets. At the same time, long-term obligations such as pension liabilities continue to grow, placing additional strain on financial stability. In response, some municipalities have turned to Pension Obligation Bonds (POBs) as a strategy to address these challenges.

What is a Pension Obligation Bond?

A Pension Obligation Bond is a taxable bond issued by a municipal entity to help fund the unfunded portion of its pension liability. The municipality issues the bond and invests the proceeds alongside the pension plan’s existing assets, typically in higher-yielding investments.

The goal is to earn a rate of return on those invested proceeds that exceeds the interest rate owed on the bond over its term. If that occurs, the municipality can improve its pension funding status and potentially reduce its long-term costs. However, the strategy also introduces additional financial risk.

The Government Finance Officers Association (GFOA) has cautioned municipalities against using POBs in most circumstances. In its official advisory, the GFOA cites the inherent risks of market volatility, timing uncertainty, and added debt burden. While POBs can appear beneficial on paper, they often increase overall financial risk if investment returns fall short of expectations.

Why Consider Pension Obligation Bonds?

Municipalities typically explore POBs for two primary reasons: budget stabilization and potential financial upside.

1. Budgetary Relief

Many local governments are operating under tight budgets and are forced to prioritize limited resources. Issuing debt to fund part or all of the pension liability can temporarily relieve pressure on annual budgets. This may stabilize required pension contributions and free up funds to support other essential public services.

2. Potential Financial Advantage

In theory, municipalities can borrow at a relatively low, fixed interest rate and invest the proceeds in assets expected to earn a higher return over time. If the pension investments outperform the bond’s interest rate, the municipality may realize a net gain.

However, these benefits depend on favorable market conditions and long-term investment performance. If those assumptions don’t hold, the financial outcome can quickly turn negative, leaving the municipality in a worse position than before the bonds were issued.

The Risks

While POBs can offer short-term relief and potential long-term benefits, they are not a cure-all. These transactions carry several significant risks that municipalities should thoroughly consider before proceeding.

1. Investment Risk

The greatest risk is that investment returns fail to exceed the bond’s interest rate.

For example, if a city issues bonds at a 5% interest rate and expects its pension assets to earn 7%, the 2% spread seems advantageous. But market performance is unpredictable, and a few years of underperformance can quickly erase those gains.

It is also important to remember that POBs are taxable instruments. This means issuers pay taxable market interest rates which increases the hurdle rate for the pension fund’s investment returns to exceed the taxable bond’s interest rate to achieve the desired advantage. Because POB proceeds are typically invested immediately, issuing bonds during an overvalued market can magnify the downside if asset values decline soon after.

2. Timing Risk

Timing is critical as POBs tend to be most effective when interest rates are low and market conditions are favorable. However, predicting either is challenging.

Municipalities are often drawn to POBs after periods of strong market performance, when the potential for future underperformance is higher. Conversely, when interest rates are high, borrowing costs increase and the “spread” between the bond rate and expected investment returns narrows. This can undermine the core financial logic behind the transaction.

3. Credit Rating Risk

Credit rating agencies typically view POBs with caution. While a POB may improve a plan’s funded status on paper, it also adds a fixed debt obligation to the municipality’s balance sheet.

This can be seen as a sign of fiscal stress or an attempt to leverage future resources, which may result in a credit rating downgrade. Such a downgrade increases borrowing costs for future projects, offsetting much of the anticipated savings.

4. Shifting Costs to Future Tax Payers

A key concern from a public policy perspective is intergenerational equity. This means the fair distribution of costs between current and future taxpayers.

Issuing POBs can transfer risk to future residents if investment performance falls short of expectations. While today’s taxpayers may experience short-term relief, future taxpayers could be left paying off the debt for assets that failed to meet return assumptions.

This outcome is particularly troubling when POBs are issued primarily as a short-term budget solution rather than as a part of a comprehensive, disciplined pension funding strategy. In such cases, the municipality is effectively kicking the can down the road and betting that future market conditions will deliver enough return to bail it out.

Conclusion

On the surface, Pension Obligation Bonds can seem like an attractive shortcut to improve pension funding and ease budget pressures. LIke any investment tool, there is a place for them when used appropriately. However, the GFOA generally advises against POBs unless paired with structural reforms and strict funding discipline.

If your municipality is considering a POB, it’s essential to:

• Use realistic actuarial and investment assumptions
• Conduct robust scenario and stress testing
• Commit to long-term funding discipline to avoid repeating past shortfalls

It is also important to consider whether your municipality may require State approval or changes in local ordinances to allow for the issuance of a POB. To improve the odds of success on your POB issuance, it’s recommended that you obtain the required permissions so that you can “strike while the iron is hot” to take advantage of that period of low interest rate or equity market declines.

If you have questions about Pension Obligation Bonds or your community’s retirement benefit liabilities, please reach out to one of our team members. We’re here to help municipalities make informed, sustainable decisions for the future.

The post What is a Pension Obligation Bond? appeared first on Odyssey Advisors, Inc.

Bottom Line Up Front

• S&P now gives more weight to debt when evaluating municipalities, making pension and OPEB liabilities more impactful on your Bond Rating. 
• Communities with higher mandated benefits may feel greater pressure on their Individual Credit Profile (ICP) scores. 
• Proactively managing and funding your pension and OPEB obligations is now a critical lever for strengthening your ICP score and protecting your community’s financial position.

When we talk with municipalities across the U.S. about their OPEB and pension plans, one question consistently rises to the top: “How does this impact our bond rating?”

It’s a fair question. Bond ratings influence everything from borrowing costs to long-term capital planning, and most communities are feeling increased pressure to show strong financial management in a challenging fiscal environment.

While many factors play into a rating, long-term liabilities, especially pension and OPEB obligations, have taken on greater importance. This became even more pronounced in September 2024 when S&P updated its municipal rating model and increased the weight of debt to 20%. 

That shift means that the structure, funding, and management of your retirement benefit programs may have a more meaningful impact on your rating than in prior years, particularly for communities in states with more “generous” benefits or limited flexibility to adjust plan designs. 

How S&P Evaluates Municipal Debt

Under S&P’s updated methodology, municipal ratings are built on five equally weighted factors, each contributing 20% to the overall score. Together, they provide a comprehensive view of a community’s financial strength and long-term resilience.

1. Economy
   Evaluates the underlying economic base, including income levels, employment trends, and tax base stability.
2. Financial Performance
   Assesses your ability to generate consistent operating results and manage annual revenues and expenditures.
3. Reserves
   Reviews the strength and reliability of available fund balances and long-term financial flexibility.
4. Liquidity Management
   Measures how effectively your community manages cash flow, short-term obligations, and access to liquidity during financial stress. 
5. Debt & Liabilities
   Captures all forms of long-term obligations—traditional municipal debt as well as pension and OPEB liabilities, which can be significant depending on state policies and benefit levels. 

With the Debt & Liabilities category now carrying increased emphasis in the overall model, pension and OPEB obligations can meaningfully influence your rating trajectory, especially for communities with higher mandated benefit levels or historically underfunded plans.

Why the Increased Debt Weighting Matters

For communities that offer more generous pension and OPEB benefits, these long-term obligations appear as a much larger “debt” on the balance sheet. In contrast, municipalities that offer modest retirement benefits—or none at all—carry a comparatively lighter burden. 

Some factors are within your control. For example, you can:

• Build and follow policies around financial reserves
• Maintain strong liquidity management practices 
• Support healthy financial performance
• Manage traditional municipal construction and infrastructure debt

However, the economy is largely out of your hands. And in many states, so are the benefit levels for pension and OPEB programs. State-mandated designs can lead two communities with similar demographics and income levels to have dramatically different debt loads depending on their state’s pension and OPEB policies. 

For municipalities in more “generous” states, maintaining a AAA rating may become increasingly challenging under S&P’s updated model. 

What Should Municipalities Be Doing?

Despite the current budgetary headwinds, it remains critical to work toward funding the existing pension & OPEB promises. Reducing these long-term liabilities helps decrease your overall “debt” and demographic trends suggest that delaying action will only make future reductions more difficult and more expensive. 
If you have more questions about this update or broader retirement and financial considerations, please reach out to your Odyssey Advisors consultant. We’re here to help you navigate the shifting landscape and strengthen your financial outlook.

The post Impact of Pension and OPEB Debt on Municipal Bond Ratings appeared first on Odyssey Advisors, Inc.

Bottom Line Up Front

• IRC Section 415 sets limits on retirement plan benefits and contributions, and exceeding them can trigger significant tax penalties and administrative complications.
• Defined Benefit and Cash Balance plans are especially vulnerable to overfunding, particularly when investment returns or contributions outpace allowable limits.
• Proactive monitoring—across funding, investments, and plan design—is essential to avoid surplus issues, stay compliant, and maintain long-term plan flexibility.

Download a PDF version of this article (Understanding IRC Section 415)

IRC Section 415 governs the maximum benefits and contributions allowed in qualified retirement plans. These rules are designed to prevent disproportionately large tax-advantaged benefits and ensure plans operate within IRS guidelines. While the limits may seem straightforward at first glance, the operational impact, especially for Defined Benefit and Cash Balance Plans, can be significant.

What is IRC Section 415?

IRC Section 415 sets maximum benefit and contribution limits for qualified retirement plans to ensure compliance and prevent excessive tax advantages. The limits differ depending on whether the plan is a Defined Benefit (DB) plan or a Defined Contribution (DC) plan. 

• Defined Benefit (DB) Plans: Annual benefit is capped at $290,000 for 2026 for a life annuity at age 65, adjusted for retirement age, payment form, and service years. 
• Defined Contribution (DC) Plans: Annual additions (employee + employer contributions) are limited to $72,000 for 2026 (excluding catch-up contributions).

Why It Matters

Section 415 isn’t just a technical rule, it directly affects funding strategies, plan design, investments, and tax outcomes. Exceeding the limit can create major issues, including taxes, penalties, and administrative complexity. 

Examples of Key Risks

• Surplus Assets: If plan assets exceed the 415 limit, any excess at termination may face a 50% reversion tax assessed by the Internal Revenue Service (IRS), plus corporate income tax on the remainder — potentially a 90% effective tax rate. 
• Funding risks: Large contributions or high investment returns can push plans beyond allowable limits, requiring extended plan duration to absorb surplus. 
• Investment Strategy: Cash Balance Plans invested aggressively (e.g., 100% equities) often generate returns far above the intended crediting rate, accelerating surplus risk.

Common Challenges for Plan Sponsors

Even well-managed plans face recurring complexities under Section 415, including: 

• Managing contributions to prevent overfunding
  Especially in years with strong investment performance. 
• Handling early retirement factors
  Benefits must be actuarially reduced, and the calculations can be complicated. 
• Accounting for joint & survivor or other optional forms of benefit
  Payment forms must be converted to an actuarial equivalent of a straight life annuity for 415 testing. 
• Monitoring potential legislative changes
  For example, if cost-of-living adjustments (COLA) are frozen due to legislation, current limits could stagnate even while plan liabilities continue to increase. 

Best Practices for Staying Compliant

Plan sponsors can reduce risk by being proactive and building 415 monitoring into annual strategic planning. 

• Monitor Annually
  Compare projected DB benefits or DC contributions against annual 415 limits.
  
• Align Investments
  Investment policies for DB/Cash Balance plans should support—not conflict with—interest crediting assumptions and long-term funding strategies.
  
• Plan for the Long Term
  Consider how contributions, plan amendments, and demographics may impact compliance over time. 

Recommended Actions

1. Annual Compliance Review
   Conduct an annual audit of plan assets, contributions, crediting rates, and projected benefits to identify potential 415 issues early. 
2. Investment Policy Alignment
   Ensure investment strategies match plan objectives and avoid excessive growth that could create surplus. 
3. Contribution Planning
   Coordinate with your actuary to structure employer contributions that meet objectives without pushing the plan toward overfunding. 
4. Scenario Testing
   Model early retirement, optional forms of payment, and alternative plan designs to ensure 415 compliance in all circumstances. 
5. Legislative Monitoring
   Stay current on IRS updates, cost-of-living adjustments, and proposed policy changes that could affect benefit limits.

Bottom Line

IRS Section 415 limits are technical, nuanced, and often misunderstood—but compliance isn’t optional. With the right monitoring and planning, employers can maintain tax-advantaged status, avoid costly penalties, and ensure long-term plan sustainability. 

If you have questions about how Section 415 applies to your retirement plan, your Odyssey consultant is here to help.

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A mix of factors is driving these rising costs, from higher provider rates and the growing use of new therapies like GLP-1 medications to the increasing prevalence of chronic conditions such as cancer and diabetes. For municipalities and public employers already managing long-term retiree healthcare promises, these pressures can quickly escalate OPEB liabilities and strain local budgets.

But the good news is, there are steps you can take. Whether it’s reassessing plan design, prefunding liabilities, or revisiting actuarial assumptions, proactive management can help stabilize costs before they spiral further.

How This Affects Local Governments

1. Soaring OPEB Liabilities 

For many municipalities, healthcare benefits represent a significant portion of their OPEB obligations. As healthcare premiums continue to rise, these liabilities will increase, directly affecting government financial statements. Higher liabilities lead to increased annual contributions, which can severely strain budgets that are already dealing with other priorities like public safety, education, and infrastructure. 

2. Budget Strain and Taxpayer Burden

With healthcare costs rising at twice the rate of general inflation, local governments may need to raise taxes or cut services to cover the escalating OPEB liabilities and stay within budget. This puts them in a difficult position, especially those already struggling with tight budgets. Unfortunately in this situation there are no easy answers – push costs to employees, narrower networks, fewer covered services, etc. The reality is that as healthcare premiums grow, they consume a larger share of the budget, leaving less room for essential services. 

3. Increased Financial Volatility

As mentioned, OPEB liabilities are especially sensitive to healthcare inflation. When costs rise unexpectedly, local governments must adjust their contributions, leading to financial volatility. This unpredictability complicates long-term financial planning and can lead to larger-than-expected liabilities, which may disrupt bond ratings and their overall financial health. 

The Ripple Effect: Retirees Feel The Impact Too

Rising healthcare premiums not only impact local governments but also their retirees who depend on these benefits. For retirees with fixed incomes, higher premiums could mean paying more out-of-pocket for healthcare services, reducing their overall financial security. 

Local governments may feel pressured to shift more healthcare costs to retirees through increased cost-sharing or reduced benefits, which could lead to dissatisfaction among retirees and even legal challenges. 

So What Should You Do?

The first step, decide that now is the time for action. Here are some key strategies you can explore: 

1. Reassess Your OPEB Plans

You can explore options to reduce OPEB liabilities by adjusting your plan design – be aware that benefits may be protected by statute or State law. Are there opportunities to increase cost-sharing with retirees or introduce tiered benefits that offer more affordable options? Reviewing your plan now can help you find ways to mitigate the impact of the rising premiums before they become unmanageable. 

2. Consider Prefunding Your OPEB Liabilities

One of the most effective ways to manage growing OPEB liabilities is by pre-funding them through an OPEB trust. This allows governments to invest contributions and potentially earn returns, which can be used to offset future costs. Pre-funding is a proactive way to reduce long-term financial pressure. 

3. Update Financial Projects and Actuarial Valuations 

Rising healthcare costs should signal immediate updates to actuarial assumptions. If you fail to adjust for these healthcare cost increases, it could lead to unpleasant surprises in your financial reporting. Regularly reviewing and updating these valuations will provide a more accurate outlook and better inform your budget planning. 

4. Explore Group Purchasing 

If you are a smaller municipality, you may want to consider joining regional purchasing cooperatives to negotiate better healthcare rates. Collaborating with other local governments can increase bargaining power with insurers and help lower premium costs, reducing the burden on retirees and your municipality. 

Long-Term Outlook: Expect More Increases

Unfortunately, experts project that healthcare costs will continue to climb beyond 2025. Many hospitals have renegotiated contracts with insurers that include higher reimbursement rates, and new medical innovations, which are adding further pressure to employer health plans.

At the same time, some insurers are scaling back or exiting the Medicare Advantage market altogether, leaving fewer options for retirees and local governments that rely on these plans to manage post-employment healthcare costs.

For municipal employers, this means preparing for yet another year of elevated costs and increasing OPEB liabilities. Without proactive planning, these rising expense can quickly lead to budget strain and difficult decisions about the level of benefits you can realistically sustain.

The Bottom Line

Healthcare inflation isn’t a short-term hurdle, it’s an ongoing challenge that can quickly reshape long-term liabilities if unchecked. As you prepare your FY 2026 budget, now is the time to revisit your OPEB funding strategy, review actuarial assumptions, and assess whether your plan design still makes sense in today’s cost environment.

If you have concerns about how these changes will affect your municipality, or if you’d like help managing your OPEB liabilities, our team can help. Contact Odyssey Advisors to start the conversation.

The post Healthcare Inflation: What It Means For Local Governments appeared first on Odyssey Advisors, Inc.

Bottom Line Up Front

• Rising inflation drives up healthcare costs, increasing your OPEB liability.
• Inflation-driven interest rate changes may partially offset liability increases, depending on your plan’s funding status.
• You can better manage inflation risk by pre-funding OPEB obligations.

Other Post-Employment Benefits (OPEB) liabilities represent the projected future costs of benefits promised to your retired employees, with retiree healthcare expenses typically making up the largest share. Because these obligations often span decades, it’s critical to understand how inflation influences them.

Inflation affects OPEB liabilities in two main ways:

1. Healthcare costs – higher inflation often means faster growth in medical expenses.
2. Discount rates – rising rates can temporarily offset liabilities, depending on your funding status.

In this article, I’ll walk you through how inflation impacts these two key assumptions and what that means for your OPEB liabilities.

Medical Cost Trends

Medical care cost inflation is the assumption used to project the future growth of healthcare expenses (physician fees, prescriptions, medical services). Since retiree medical costs are often the largest component of OPEB, higher premiums directly lead to higher liabilities.

Real-World Example: Post-COVID Surge

After the COVID-19 pandemic, we saw a spike in healthcare costs as people returned for procedures that they deferred, as well as healthcare providers looking to make up for lost earnings during a period of higher inflation. As a result, many actuaries (including myself) updated our assumptions to better reflect short-term spikes before projecting smaller, steadier increases later.

As of 2021, actuaries now rely on the Getzen Healthcare Cost Trend Model, which links medical costs to long-term economic growth while accounting for short-term shocks like COVID.

This Getzen Model incorporates assumptions about economic growth (GDP per capita), long-term healthcare cost growth, and a gradually declining “excess cost growth” factor that reflects how much faster healthcare costs are expected to rise compared to the overall economy. 

By applying this framework and adjusting short-term assumptions to account for elevated cost pressures in the early 2020s, most actuaries developed annual trend rates that started higher but eventually settled back into more sustainable, economically aligned growth. 

The Unique Drives of Medical Cost Growth

As you can see in the graph above, general inflation and medical care inflation are not perfectly correlated because a variety of additional factors drive healthcare cost growth beyond overall price changes in the economy, including but not limited to:

1. Cost shifting plays a significant role: when government programs reimburse providers at lower rates, a greater share of costs is often shifted to private insurers. Similarly, employers often pass on rising healthcare expenses to employees through higher premiums, deductibles, and out-of-pocket maximums, often in exchange for more affordable plans or Health Savings Accounts. 
2. Certain government mandates, including required coverage of certain benefits and regulatory changes, can increase the cost of providing care and insurance. 
3. Uncompensated care from uninsured or underinsured patients also further raises costs, as providers often offset these losses by charging higher prices to insured populations. 
4. Advances in medical technology and the introduction of new treatments, while improving outcomes, often come with a premium, especially with costly specialty drugs and procedures. 
5. Demographic changes, such as an aging population and rising rates of chronic conditions, also contribute to increased demand for healthcare services. 

Together, these factors place sustained upward pressure on healthcare costs, often outpacing general inflation over the long term.

How Inflation Affects Discount Rates

The two key rates used in the discount rate calculation are the 20-year municipal bond index rate and the long-term rate of return on plan assets. Your plan’s funding status determines how these rates are applied: 

• Fully funded plans – the discount rate equals the expected long-term rate of return (inflation plus the long-term return). 
• Partially funded plans – the discount rate will be a blended rate equivalent to discounting all expected future benefit payments that may be funded by assets held in the OPEB Trust at the expected long-term rate of return, with all other payments discounted using the 20-year index of yields on high-grade municipal bonds. (Most plans fall into this category.)
• Unfunded plans – the discount rate will be the 20-year index of yields on high-grade municipal bonds.

When inflation rises, municipal bond yields usually rise as well. For underfunded plans, this may lead to a reduction in your disclosed Total OPEB Liability (TOL) due to a higher discount rate being applied. But keep in mind: historically, elevated inflation in the U.S. has been short-lived. So while your liabilities may temporarily decline, that effect could reverse as inflation and rates settle back down. 

Inflation rates also influence financial markets. During high-inflation periods, certain sectors may see declining equity prices, which can negatively impact overall portfolio performance. Depending on the composition of the investments in your OPEB Trust, you may realize lower returns during these periods of high inflation. For fully funded plans, those reduced returns could lead to a downward adjustment in the discount rate, which may increase your TOL.

For partially funded plans, higher inflation may boost the municipal bond rate, which can raise the blended discount rate and reduce liabilities. However, if inflation depresses asset returns or shortens the period during which assets can cover benefits, that benefit could be offset or even erased.

The discount rate for a funded OPEB plan is generally less volatile compared to that of an unfunded plan, which relies solely on the municipal bond rate. That’s why establishing and maintaining funding remains the most effective strategy for you to manage long-term OPEB obligations.

Read more: Selecting the Best Funding Strategy for Your OPEB Trust

Key Takeaways

Inflation impacts your OPEB liability, mainly through its effect on two assumptions: 

• Medical cost trend rates – periods of high inflation often result in short-term spikes in healthcare costs.
• Discount rates – rising bond rates may temporarily reduce liabilities in unfunded plans, while funded plans could see liabilities rise if investment returns suffer. 

Although there is no way to completely shield your plan from the effects of inflation, staying informed about economic trends will allow you to anticipate potential changes. Regularly updating actuarial assumptions and implementing sound funding strategies can help mitigate inflation’s impact and help prepare you for any financial challenges that come your way. 

At Odyssey Advisors, we’re here to support you in navigating these complex challenges. Please don’t hesitate to contact us if you have questions or want guidance tailored to your needs.

The post Understanding the Impact of Inflation on OPEB Liabilities appeared first on Odyssey Advisors, Inc.

Bottom Line Up Front

• Frequent RMD withdrawals may look smart, but transaction fees can quietly drain thousands from your retirement income
• A $100 fee on monthly withdrawals can eat up more than 16% of annual distributions, undermining the benefits of a steady withdrawal strategy
• Simple fixes like consolidating withdrawals, rolling over to an IRA, or choosing a no-fee custodian can protect more of your money

You planned carefully, saved for years, and finally retired. But what if something as small as a $100 fee could quietly add up to thousands of dollars from your nest egg? For many retirees taking Required Minimum Distributions (RMDs), that’s exactly what may be happening.

RMDs are mandatory withdrawals that the IRS requires once you reach a certain age, designed to ensure the government eventually collects taxes on tax-deferred retirement accounts.

A recent Wall Street Journal article highlighted a new trend: more retirees are taking their RMDs in smaller, regular installments rather than in a lump sum each year. On paper, this approach resembles dollar-cost averaging in reverse, spreading out withdrawals to reduce timing risk.

Here’s the catch: while the strategy looks smart in theory, transaction fees can turn it into a pretty costly mistake if you’re not careful.

The Appeal of Dollar-Cost Averaging in Retirement

At first glance, spreading out your RMDs through smaller, regular withdrawals seems like a safe and disciplined approach. The idea, often called “reverse dollar-cost averaging,” is that by taking steady payments throughout the year, you can reduce the risk of bad timing.

Instead of worrying about pulling a lump sum right before a market downturn, you smooth withdrawals across different points in the market cycle. For many retirees, this method also provides a sense of stability, almost like receiving a paycheck again, which can make day-to-day budgeting easier. On top of that, it removes the stress of trying to guess the “right” moment to take money out, reducing the temptation to make timing mistakes that could hurt long-term returns.

The Cost Nobody Talks About: Transaction Fees

Here’s where things get tricky. Many employer-sponsored retirement plans, particularly 401(k)s, charge a fee each time you take a distribution.

Example:

Imagine a retiree withdrawing $600 every month from their 401(k). If each transaction comes with a $100 fee, that’s 17% gone immediately before investment returns and before taxes.

Compare that with an IRA or brokerage account, where ACH transfers are often free. Suddenly, the “safe” strategy looks expensive.

When the Math Doesn’t Math

Let’s break it down further:

• $100 per withdrawal x 12 months = $1,200 in annual fees
• If your RMD is $7,200 for the year, that’s more than 16% lost to fees
• Over a decade, that’s $12,000 drained from your retirement income

Not only do these recurring fees reduce income, but they can also amplify the sequence of return risk — the danger of selling investments at the wrong time. Paying extra fees accelerates the erosion.

Better Withdrawal Strategies

The good news is that retirees have several ways to minimize or even eliminate transaction fees on their RMDs. One of the most effective approaches is rolling assets from an employer-sponsored plan into an IRA, since many custodians don’t charge for routine distributions. Another option is to rethink the frequency of withdrawals. Instead of taking money out every month and racking up charges, some retirees opt for quarterly or even a single annual distribution. This reduces the number of transactions while still meeting IRS requirements.

It’s also worth comparing custodians, because some providers offer no-fee transfers while others tack on steep charges for each withdrawal. Even if you’re happy with your current setup, reviewing the plan documents and fee schedule can uncover hidden costs you may not have realized you were paying. A little attention to these details can mean thousands of dollars saved over the course of retirement.

Questions Retirees (and Advisors) Should Be Asking

Before setting your RMD schedule, ask:

• Am I required to pay a fee every time I take a distribution?
• Would consolidating withdrawals save me money?
• Is my retirement account the best vehicle for my withdrawal strategy?

A few simple questions can prevent thousands of unnecessary costs.

Final Thoughts

Reverse dollar-cost averaging can be a smart way to manage retirement income, but only if the math works in your favor. Transaction fees are often overlooked, yet they can quietly eat away at your nest egg, turning a sound strategy into an expensive one.

Before settling on a withdrawal plan, retirees and advisors should carefully evaluate the real costs. Sometimes, the smartest move isn’t about timing the market; it’s about avoiding unnecessary fees.

The post The Hidden Costs of RMDs: Why Transaction Fees Matter More Than You Think appeared first on Odyssey Advisors, Inc.