Funded status volatility can be controlled but it cannot be completely eliminated because there is no asset that will behave exactly like the liabilities. Residual risk will always exist due to actuarial adjustments, survivor bias, and investments risks.
The formulas to determine a plan’s projected liability stream are periodically updated with currently available actuarial estimates. These non-market related factors such as changes in benefit formulas or updates in longevity and inflation assumptions make the liabilities a moving target. Survivor bias refers to the fact that pension liabilities are discounted with the yield of corporate bonds but they possess the credit quality of a risk-free asset. Liabilities, unlike assets, are therefore immune from credit events. Investment risks refer to the limited assets that are investable (i.e. zero-coupon corporate bonds and bonds beyond 30 years to maturity either do not exist or are not available in size).
For all these reasons, funded status volatility cannot be reduced below a barrier level. Plan sponsors should realize that beyond a certain point, further customization of their liability hedging assets will yield diminishing marginal returns from a volatility reduction perspective.