beyond (k) | PLANADVISER January/February 2017

Freezing DB Plans

By Rebecca Moore | January/February 2017

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.