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).
Since this is my final blog in my “So You’ve Frozen Your DB plan – Now what?” series, I’m wondering if you are humming any songs in your head yet? Any guesses on what song I’m connecting these blogs to? I’ll give you two hints. Hint #1 – Sir Paul wrote it.
As I’ve been discussing, there are generally three steps a plan sponsor can consider when winding down their frozen defined benefit (DB) plan (that’s your #2 hint!). Today, I’d like to discuss the third step – develop an asset allocation strategy.
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.
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.