IF you purchased a large home when
raising a family, would you remain there,
with all the expenses, once the kids had
grown and moved away? For many, it is
worthwhile to downsize to fit a new set of
needs and goals.
This is the analogy that 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 fees disappear altogether,
so a reassessment of needs and services
is always in order once the freezing has
According to Gallagher, as well as
Stewart Lawrence, national retirement
practice leader at Segal Consulting, the
costs of administering the plan, of actuary
and accountant services, and of Pension
Benefit Guaranty Corporation (PBGC)
premiums still confront plan sponsors.
While most employers outsource plan
administration, says Gallagher, others
team with providers to manage plan
data and answer phone calls concerning
benefit accruals. Additionally, these plans
need actuaries and accountants to evaluate liabilities, calculate contributions
and perform audits.
Lawrence notes that while auditing a
plan may grow slightly easier as a frozen
plan decreases in number of participants,
the costs, for the most part, will remain
the same. “The costs haven’t changed. It
might be easier to do an audit of those
plans, and the fees from the actuarial
calculation might go down, but the
accountant and actuary will still charge
their basic fee,” he says.
Plan sponsors that terminate their
plan—which can occur only if an employer
pays out the value to each participant
in a single sum, or finds an insurance
company to step into the shoes of the plan
via a pension buyout—face no concerns
over PBGC fees, as once a plan is terminated, the fees are dropped.
According to Lawrence, DB plans can
be in one of four stages—ongoing, closed,
frozen or terminated. A terminated plan
requires that an employer settle the plan
obligation with the workers; ongoing
plans have participants who are still accumulating benefits as service continues;
closed plans, also known as soft-frozen
plans, ban new participants from entering,
yet allow existing ones to continue benefit
accrual; and frozen plans strictly disallow
all participants from accruing benefits.
The experts warn that it is generally
unsuitable for a closed plan to remain in
that state indefinitely.
“Closed plans can be a temporary
state, but, at some point, just by the passage
of time, it’ll become a discriminatory plan,
and then it has to become a frozen plan,”
Lawrence explains. However, lawmakers
are working to amend nondiscrimination
rules for closed or frozen plans.
Rather than allow a closed plan to
eventually freeze, employers should lay
out a journey for the plan and then stick to
following it, he advises. “Many employers
overlook the journey to get to the destination,” he says.
Lawrence recommends, as a first
step, increasing risk mitigation, through
gauging the plan’s risk profile, and then
conferring with a consultant on how to
decrease uncompensated risk.
“If you don’t have the big picture of
not only the destination but of the steps
and the journey, it might work against the
employer in the future,” he says.
Automated technology—along with
self-service support—can help reduce
expensive costs previously accepted for
active pension plans. Once a plan is
frozen, employers should calculate and
certify all plan benefits immediately.
As a final move, she says, employers
may consider switching vendors—an
action traditionally considered expensive
with active plans. But, for a plan that is
frozen, there are minimal expenses to
consider. —Amanda Umpierrez