Most DB plan sponsors that freeze their plan want to terminate it completely someday.
Terminating the plan allows plan sponsors to:
- Pay plan participants the benefit they have earned.
- Eliminate the liability that they have had to manage as part of the plan.
There are a lot of moving pieces leading up to a DB plan termination including:
- Administrative tasks (such as participant notices, election forms, government filings, etc.),
- Plan document amendments,
- Annuity purchase decisions,
- Protecting the plan’s funding status (which is so critical to maintain during this process).
You likely chose to freeze your defined benefit (DB) plan for a variety of reasons – cost of capital, volatility of contributions, balance sheet impact – but have you considered what comes next?
There are two primary options:
- Terminate the plan and pay all the benefits in full – which most likely has higher expected costs but lower long-term market risk.
- Maintain the frozen plan – which most likely has lower expected costs but comes with a higher risk.
Everybody loves cheap money, right? Well, if you’re a borrower, you’ve definitely benefited from actions taken by the Federal Reserve to keep interest rates at record lows.
But not everyone is thrilled with this wave of cheap money. Sponsors of defined benefit plans, in particular, have dealt with surging plan liabilities due to low interest rates. Read more
I know what you’re thinking. First Kenny Rogers and now the Rolling Stones? Why does this guy keep quoting 1980s songs and relating them to defined benefit (DB) plans?
Well, there were two things I did during my summer nights as a teenager growing up in the ’80s that left a lifelong impact on me – listening to music and dreaming about DB plans. Didn’t we all? More on this later….
Anyway, in my last post, I introduced the idea of dynamic asset allocation (DAA) as a DB plan risk management strategy. This strategy works particularly well with hard frozen DB plans.
In my previous blog, I talked about risk as it relates to managing a defined benefit (DB) pension plan. The long and short of it is that risk is what happens when DB plan sponsors are busy making other assumptions.
Today, the combination of several factors—including market volatility, low interest rates and recent legislation—has created significant challenges for DB plan sponsors. Fortunately, the pension industry is helping plan sponsors manage these risks with a number of innovative approaches.