Sibson Offers Factors for Terminating Frozen DB

Sibson Consulting said employers need to analyze the cost of paying lump sums and buying a group annuity as a DB plan typically will not have sufficient assets to pay these costs. Today’s low interest rates result in the high cost of annuities or lump sums. An annuity can cost 10% to 15% more than the accounting liability on the employer’s books, according to a Sibson Spotlight report.

Employers might defer the current cost of a full termination by considering asset allocations that more closely match liabilities or by transferring risk to participants through lump-sum windows. If plan assets are anticipated to generate a risk-adjusted rate of earnings that is higher than the discount rate reflected in an annuity purchase or lump-sum cash-out, employers may also face an opportunity cost in terminating the plan or implementing a lump-sum window.

Plan Termination Tasks 

Employers must verify plan data such as contact information and beneficiary status. Sibson recommends that employers complete this task when their plan is frozen should they decide to eventually pursue termination.

The entity with the authority to terminate the plan—usually the board of directors—must approve the plan termination. And, if the employer does not offer a lump-sum option but plans to do so, the employer should amend the plan, generally before the plan termination date.

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Employers must also calculate benefits before purchasing annuities and prepare government filings. An Internal Revenue Service (IRS) determination letter is not required, but Sibson said an employer should file one before a Pension Benefit Guaranty Corp (PBGC) Termination Notice.

Form 5500s must be filed for the plan until all the assets have been distributed, at which point a final Form 5500 must be filed.

The PBGC requires multiple notices be sent to affected participants, including a Notice of Intent to Terminate between 60 and 90 days prior to the plan termination date. A Notice of Plan Benefits must be sent prior to filing the PBGC Termination Notice, which must be filed no later than 180 days after the proposed Plan Termination Date. Participants must also receive a notice of possible annuity providers at least 45 days before actual distribution and continue to receive standard notices as well as election forms.

The final distribution of assets may occur between 60 and 240 days after the Termination Notice is filed with the PBGC.

Sibson’s report is available here.