Frozen DB Plans Still Need Advising

If you purchased a large home when raising a family, would you want to continue to pay for it once the kids had grown and moved away? For many, it may be worth downsizing to fit a new set of needs and goals.

That is the analogy Monica Gallagher, a partner at October Three Consulting, utilizes to describe the work of administering a frozen defined benefit (DB) plan. Just because a plan is frozen does not mean the job of managing it will go away altogether, so a reassessment of needs and services is always in order once the freezing has been done.

According to Gallagher, along with Stewart Lawrence, national retirement practice leader from Segal Consulting, sponsors still need help with administration of the plan; actuarial and accounting tasks; and payment of Pension Benefit Guaranty Corporation (PBGC) premiums. Further services  needed might include supervising the actuaries and accountants who evaluate liabilities, calculate contributions and otherwise oversee the plan.

Lawrence notes that while the audit process for a frozen plan may grow slightly easier as the number of participants declines, the costs will, for the most part, remain the same. “The fees from the actuarial calculation might go down, but the accountant and actuary will still charge their basic fee,” he says. Plan sponsors may need considerable help to maximize cost efficiency in this environment.

According to Lawrence, defined benefit plans can be in one of four stages—ongoing, closed, frozen or terminated—and advisers can play a role at each. A terminated plan requires that an employer build a process for settling the plan obligations; ongoing plans have participants who are still accumulating benefits as service continues; closed plans, also known as soft-frozen plans, block new participants from entering, yet allow existing employees to resume benefit accrual; and frozen plans strictly disallow all participants from accruing benefits.

“For most, you start with an ongoing plan, then the client may become a closed plan, a frozen plan, and, at some point, you’re going to be a terminated plan,” he explains.