For a while there, liability-driven investing (LDI) was a hot item in employee benefit circles. You don't hear as much about it these days, but the need is still there. Here are five frequently-asked questions I'm hearing from clients.

Q: There was a flurry of publicity surrounding LDI. Has that fad passed?

A: There certainly has been quite a lot of activity surrounding LDI. Much of the early wave of material varied in content and focus and much misinformation exists. I dare not refer to it as a fad, however. The nexus of LDI began with financial reporting rules requiring liability values be marked-to-market and it slowly grew important; the big change came with the Pension Protection Act of 2006, which also requires that liability values reflect market pricing in some way. Without any mark-to-market, there can be no LDI, and because it seems our lives will be tied to market values, we expect LDI to be around for the long haul.

Q: How has LDI endured and evolved since the first wave of LDI materials emerged?

A: LDI approaches to investment policy have been simplified into several fundamental components. Initially, a lot of LDI being discussed relied upon the use of derivative contracts, interest rate swaps, and were considered an all-or-nothing proposition. That went nowhere other than to stoke awareness of risk reduction possibilities. Since then, we have discussed much different LDI approaches with numerous plan sponsors and have implemented or are in process of implementing LDI risk management strategies at most. LDI is not for everyone but many are opting to adopt it.

Q: Who is adopting LDI?

A: Contrary to my own expectations, plans of all sizes are finding LDI appealing. I thought the first movers were going to be sponsors whose plans posed very high risk to the organization and who had high governance budgets, i.e., very large plans.. In actuality, plans of all sizes are finding LDI worth adopting.

Q: Are there any successful results yet? Does it work?

A: Absolutely, yes. And it's a thrill for an actuary. Why do I say this? In an exaggerated way, actuaries never know if we re right about what we do until years or decades later. The beauty about LDI, at least with our methodologies, is that we can use our monthly monitoring tools to measure the success of LDI immediately. It's obvious if the LDI program is working or not, and this is even in early stage implementation. Our LDI works, and it begins working right away.

Q: What does this success mean for defined benefit plans?

A: Modern plan management techniques, supported by robust technology and integrated policy management, have alleviated most of the ills associated with defined benefit (DB) plans. In common parlance, DB plans aren t what they used to be. In essence, the bane of DB plans wasn t the cost level per se but rather the unexpected changes in cost from year to year that we couldn t seem to tame. Thanks to the silver lining of the Pension Protection Act and the concurrent mark-to-market approach with financial reporting regimes, we now know and have proof that this animal can indeed be tamed.