Welcome to Ask an Adviser, EBN’s weekly column in which benefit brokers and advisers answer (anonymous) queries sent in by our readers. Looking for some expert advice? Please submit questions to firstname.lastname@example.org. This week, we asked Robin Powell, a benefits consultant with Strategic Benefits Advisors, to weigh in on the following: How do we best position our frozen DB plan for termination?
While terminating a defined benefit (DB) plan will save a company money in the long run, these projects are a lot of work and typically require a significant one-time cash outlay, which makes them difficult to get off the ground without strong internal support. Identifying an executive sponsor and making specific team leads accountable for the project’s success can help pave the way to success.
A typical plan termination project runs 12 to 18 months from the time the decision is made. The date of plan termination is usually set at month three or four, becoming the anchor date around which all other activities are based.
There are steps plan sponsors can take along the way, not to mention well in advance of termination, that will ensure a smoother experience. Begin by addressing administrative gaps and data errors to ensure final calculated benefits are accurate. Providing these final benefit calculations to participants ahead of a plan termination can help identify potential data issues early and hasten resolution of any disputes. DB plan administrators should keep pension rosters current via regular death audits and address searches, and by staying in touch with participants and their beneficiaries, even if they are not yet receiving payments.
Other administrative processes, like returned mail, uncashed checks and required minimum distributions, should be shored up prior to termination. It is also prudent for plan sponsors to establish a process for cashing out small balances to default IRAs prior to plan termination. These changes may require plan amendments, so getting started early is key.
While the administrative prep is underway, asset and liability prep should be happening simultaneously. To reduce the volatility of plan liabilities prior to termination, plan sponsors should work with their actuary to determine a realistic horizon for termination while also building a de-risking strategy.
De-risking can be achieved in a variety of ways, from downsizing the population via targeted lump-sum windows to pulling out small annuities from the plan through small-annuity purchases to investing in bonds that are matched to the plan’s benefit payments (known as liability-driven investing). Specific actions taken will ultimately depend on the funding level of the plan, demographics of the population and organizational priorities. De-risking recommendations should be informed by forecasting and brought before the retirement committee for approval at the appropriate time.