In my past few blogs, I’ve been discussing some of the strategies that Defined Benefit (DB) plan sponsors can consider in order to terminate their plan. There are generally three steps a plan sponsor can take. Today, I’d like to discuss the second step – develop a funding strategy.
Step 2 – Develop a funding strategy
After a plan sponsor has an understanding of what the cost to terminate the DB plan will be, the next step is to look at the available funding strategies for achieving this.
October is a busy month. It’s National Book Month, National Cyber Security Awareness Month, Domestic Violence Awareness Month and National Employee Ownership Month, to name just a few of the topics that are commemorated. It’s the last of these that is the most interesting to me in my role as an Employee Stock Ownership Plan (ESOP) consultant.
If you’ve read my past blogs, you’ll have noted that there are many advantages ESOPs bring to the selling business owners, the company and the employees. So, why do we need a month to celebrate (other than the fact that everyone likes cake and ice cream)? Read more
Over the past few years, I’ve heard the joke that ends with this punch line: “Yesterday you were a prospect, today you’re a client!” It resonates in the sales world because of the feeling some clients have once they sign on the dotted line.
It’s a feeling of under appreciation and loss. Why? Because before a client has signed, they’re courted as prospects – receiving high touch, responsive and on demand service.
But, once the sales experience is over, the prospect becomes a client and gets handed off to a different set of people and processes. And sometimes, all of the sudden, the courtship is over! The end of the attentive service is significant, because as I’ve said before: your clients are your competitor’s best prospects, and the end of this courtship experience is exactly what I’m talking about.
The good news is that moving out of the courtship stage doesn’t have to be a letdown. In fact, there are plenty of great retirement plan teams that haven’t lost a client. Why? Read more
Nobody likes to have something taken away from them, especially kids. At least at my house, when one of my kids takes a toy from another one I always have to intervene. Of course, two minutes later the toy is laying on the floor and no one is playing with it. They have quickly moved on to something else, but there was still an emotional outburst.
You also hear a version of this from employees who are not contributing to their retirement plan. They often cite “I can’t afford to” or “I have too many other priorities” as reasons. This emotional response is a big reason why some plan sponsors are apprehensive of implementing automatic enrollment. They are afraid of the reaction/feedback they will have to deal with by employees who all of a sudden see a reduction in their paycheck. Read more
There are generally three steps to terminate a defined benefit (DB) plan. Today, let’s take a look at the first step– evaluating the cost.
Step 1– Evaluating the cost of terminating a DB plan
The cost to terminate a DB plan is generally more than the cost to fully fund a hard frozen plan. Many plan sponsors don’t realize this. A common question I hear is “My plan is 100% funded under IRS rules. Why isn’t it sufficiently funded to terminate?” Sponsors may also not have made minimum required contributions for some time which could leave them under the impression their plan is funded enough to terminate it.
Different rules apply when determining plan termination liability. Plan sponsors can incorrectly assume if their plan is 100% funded from an ongoing perspective they are at the point that they can terminate the plan with no additional cost.