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beyond (k) | PLANADVISER January/February 2017

Freezing DB Plans

Funding volatility and costs are two of the biggest reasons why.

By Rebecca Moore editors@assetinternational.com | January/February 2017
Page 1 of 3
Art by Brian Rea

There are several reasons a plan sponsor may freeze its defined benefit (DB) plan, and there are several decisions the adviser should help his client work through when it is about to do so, as well as show the sponsor how it should manage the plan afterward.

Sabrina Bailey, global head of retirement solutions at Northern Trust in Chicago says financial considerations are usually the main objective in freezing a defined benefit plan. The volatility in funding is shown on a sponsoring firm’s financial statement, so, often a plan will be frozen for that reason—to better manage volatility that shows up in these statements. Other cost factors that may lead a plan sponsor to freeze its plan include the cost of running it and the Pension Benefit Guaranty Corporation (PBGC) premiums.

“When plan sponsors look at their overall spend on employee benefits, they question the best way to spend to give the maximum value to employees,” Bailey notes. Advisers can show them that “the cost of a DB plan relevant to value may be less than spending on health care or a DC [defined contribution] plan match.”

Bailey also contends some DB plan sponsors freeze their plans because these are not necessarily valued by employees as highly as they were in the past. “With employees changing jobs every four to five years, they may not reach the benefit a DB plan offers,” she says.

Reaching the Decision
Stewart Lawrence, national retirement practice leader for the Segal Group, in New York City, says there is no right or wrong way in deciding to freeze a defined benefit plan; it is a value judgment for plan sponsors. They just need to review and evaluate their options before they follow through.

While many plan sponsors want to manage their balance sheet volatility, Segal lets them know there are other ways to do that besides freezing the plan. There are things they can do with their investment portfolio, and, if they have excess cash, they can put that into the plan and also get a tax deduction.