According to Lawrence, some plan sponsors think that by
freezing their plan they are escaping the volatility of required contributions.
“We explain that the only way to do that is to terminate the plan and buy an
annuity, and that’s very expensive,” he says. He further explains that if the
plan is underfunded, the plan sponsor still has to fund it. Freezing only gets
rid of the funding requirement for new accruals. Lawrence observes that the
funding requirement has a numerical as well as a volatility value; if the
market crashes, the plan’s funding will suffer further.
He adds that advisers must emphasize to sponsors that work
force implications are important to keep in mind. Usually, freezing the plan
hurts older, longer-tenured employees the most. “So, what are the savings
implications? As more and more employees cannot afford to retire, they ‘retire
on the job,’ creating havoc on productivity and succession planning,” Lawrence
says. “Not only do older folks stay around, but others see no possibility for
moving up, so they may leave.”
Once the Decision Is Made
Lawrence says freezing a plan is not an elaborate process;
the plan sponsor has to make a resolution to amend the plan to freeze it. But
some legal disclosures are required.
He notes that plan sponsors will still have to manage
investments and fund the plan. Advisers, accountants and actuaries will still
be involved on an ongoing basis, but the role of advisers may change. “When
participants are not accruing benefits, the profile of the plan’s liability
changes,” he says.
According to Bailey, the most critical thing an adviser can
do is help DB plan sponsors understand the long-term impact of freezing their
plan on its investment portfolio. “They can create a road map of where it is
today and how to anticipate the shift, over time, in liability and payments.
How should allocations align to fit that need?” she says. “This will help the
plan make asset changes at the right time and at the most cost-effective time.”
Bailey also says the allocation plan should consider how to best manage
volatility relative to how much the plan sponsor will contribute in cash. An
adviser should understand the plan sponsor’s budget and how to integrate that
with making benefit payments.