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.
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.
Forget the Joneses. When it comes to saving for retirement, what investors really need is to keep up with inflation. Because bit by bit, year by year, inflation steals away our purchasing power.
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.
As thousands of boomers a day flood into retirement, many experts are beginning to feel that the financial tools and strategies Americans need for living in retirement may not be the same exact tools and strategies that we need to save for retirement. Retirees need tools and strategies specifically designed to help them transition from a life fueled by an employer-provided paycheck to a life supported by a paycheck from themselves — a mycheck. That’s a pretty big deal, and it is often underestimated by many retirees.
For many without employer-provided health care, the Affordable Care Act may offer the first opportunity to purchase affordable insurance. Those with an entrepreneurial spirit (but a family to protect) may be willing to step away from their employer’s coverage and take a chance pursuing their dreams. Even the gap between an early retirement (forced or otherwise) and eligibility for Medicare coverage may no longer be a period of high financial risk.
On October 1, your state’s Health Insurance Marketplace will open its digital doors to health care window shoppers. Whether you’re looking forward to the Affordable Care Act with anticipation, dread, or a shrug, every American will be impacted, whether directly or indirectly.
Safety is often thought about in terms of the present: keeping children out of harm’s way, protecting family, wearing a seat belt…the list could go on forever. But, how often do we ask ourselves, how is the safety of my financial future?
Employer sponsored 401(k) plans and other work site retirement plans have helped millions of workers save trillions of dollars. These dollars not only help create security, but also peace of mind that medicine can be paid for and unforeseen situations can be taken care of. And most importantly, these dollars help ensure quality of life can be sustained long after retirement. Read more