In my last few blog posts, I’ve talked about the key events involved in executing a defined benefit (DB) plan termination. Those events are:
- Execute on your asset allocation strategy. Dynamic Asset Allocation is a common method used to help reduce risk as a DB plan approaches termination.
- Manage all of the administrative requirements that are involved in a DB plan termination. As mentioned above, this includes participant notices and filings, among other things.
- Final asset and liability transfer, also known as risk transfer. This step includes the payment of participant benefits as lump sum distribution or annuity purchases.
In this post, I’ll focus on the second event—the administrative process that the plan sponsor must follow. This includes providing plan participants written notice, working with the Pension Benefit Guaranty Corporation (PBGC) and the Internal Revenue Service (IRS) as well as preparing for a final risk transfer.
This event can be broken down into the following 3 steps:
Step 1: Set Proposed Termination Date
- Board of directors resolution including details about the termination
- Notice to all affected parties of intent to terminate
- Determination of distribution options
Step 2: Demonstrate Asset Sufficiency
- Certify participant benefits
- Demonstrate plan assets meet or exceed liabilities
- Provide notice of plan benefits to participants
- Prepare PBGC and IRS required filings*
Step 3: Final Risk Transfer
- Determine distribution date
- Final update of participant benefits
- Collect participant benefit elections
- Choose annuity provider
- File PBGC and IRS forms*
- Distribute plan assets
*While it’s not required, it is a best practice for a plan sponsor to file with the IRS to get a favorable letter of determination on the plan termination. Although that process takes up to a year, plan sponsors should think of it as a sort of assurance that they handled the plan termination correctly (at least in the eyes of the IRS).
As you read through these steps, it’s easy to become overwhelmed. There’s a lot to keep track of and little room for error. That’s why it’s so important for plan sponsors to work closely with experienced professionals who have a track record of success.
In my next blog, I’ll talk in more detail about step three, final risk transfer. There are several options a plan sponsor should consider, and I look forward to discussing that with you.
In addition to blogging here, I also tweet regularly about DB topics of interest. Click to follow me on Twitter- @scottruba.
The subject matter in this communication is provided with the understanding that The Principal® is not rendering legal, accounting, or tax advice. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements.
Asset allocation/diversification does not guarantee a profit or protect against a loss. Use of dynamic asset allocation does not guarantee improvement in plan funding status nor the timing of any improvement.
Insurance products and plan administrative services are provided by Principal Life Insurance Company a member of the Principal Financial Group® (The Principal®), Des Moines, IA 50392.