PLANSPONSOR - August/September 2020 - 14

UPFRONT
Freezing the
Company DB
Plan Does
Not Suspend
Its Needs
A FROZEN defined benefit (DB) plan is
one in which there are no more accruals-
no more growth in the benefit-for any
individual, says Ari Jacobs, senior partner
and global retirement solutions leader
at Aon. He clarifies that this is different
from a closed DB plan, in which there are
still accruals for participants in the plan
before it was closed.
With frozen plans, for the most part,
plan sponsors still must do everything
they did when the plan was ongoing, says
John Lowell, actuary and partner with
October Three Consulting LLC. " That's
where many people go wrong; they think,
because they're not giving anything to
employees anymore, the staff they had
dedicated to the plan isn't necessary, " he
says. " To a large extent, they stop paying
attention to the plan. They're depending
almost entirely on what advisers, including
actuaries and accountants, tell them to do. "
Lowell explains that DB sponsors
may have relied heavily on their adviser
when the plan was open, but, when a
plan is frozen, it becomes " a bit trickier. "
He says consultant firms generally look
for relationships that will generate longterm
revenue for them and long-term
profitability. " If they don't think they'll
get that, the natural business reaction is
to do what they can to generate revenue
in the short term, " he says. " If a client
wants to terminate its DB plan in the next
three years, after which the consultant
will lose the business, he can do one of
two things: bring ideas likely to generate
revenue or sit back and wait for the client
to ask questions. He probably is not going
to bring a lot of creative solutions in the
hopes of building a relationship. "
A frozen DB plan still has a fixed set of
promises, based on when each individual
will leave the company and get payments
for life, Jacobs notes. Sponsors need to
continue to manage the risk associated with
those promises, which, he explains, is the
asset/liability mismatch. " Assets will move
with the market and liabilities change with
discount-rate moves, and these can lead to
changes in funded status, " Jacobs says. He
adds that sponsors also need to make sure
they know how much their plan is underfunded
and how much cash must be put
into the plan to fill the gap.
As for expectations from service
providers, Jacobs says the biggest change is
that calculations for growing benefits are
no longer needed. In many cases, benefit
calculations that would have had to be
done over years could be completed early.
However, he notes, sponsors will still need
to make required contributions annually.
A sponsor may have saved money by
not having a person or department dedicated
to its DB plan, but, Lowell contends,
14 PLANSPONSOR.COM August - September 2020 Art by Simone Virgini
the costs of being without such a person
or department far exceed what the sponsor
saved. For example, Lowell says, companies
tight on cash that neglect to discuss
this with their actuary may find it recommending
they put substantial money into
the plan. " Sponsors expect actuaries to
ask questions and to know how to advise
them, but actuaries expect the sponsor to
ask questions. ... Unnecessary costs for
frozen plans come from omissions, things
plan sponsors are not thinking about that a
dedicated person would think about. "
Over time, a frozen plan will get to
the point where it is fully funded. Jacobs
says sponsors then must decide when the
time is right to reduce their plan's liability;
this they can do by settling some of it
through a lump-sum window or selling
the liability to an insurance company.
" It's not a necessity, but sponsors would
want to do that because, at some point,
they'll have something on their balance
sheet that could be effectively managed
by someone else, " he says. " Do they want
to have that liability on their balance sheet
when there are organizations that do that
for a living? " -Rebecca Moore
http://www.PLANSPONSOR.COM
PLANSPONSOR - August/September 2020

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