Terminations & Freezes - The Challenge

Today 401(k) plans are replacing defined benefit pension plans as the primary retirement plan structure for many employers. This has been a trend for more than a decade but appears to be gaining momentum due to new regulatory, accounting and funding requirements imposed on defined benefit plans under the Pension Protection Act of 2006. (PPA) Typically the first step toward plan termination involves freezing plan benefit accruals. Once benefits have been frozen future service costs are eliminated, however, other plan financial and longevity risks remain. In order to fully mitigate these risks and ongoing administrative costs plan sponsors can elect to annuitize plan benefit obligations utilizing a single premium group annuity contract (known as terminal funding).

Terminating a pension plan is a complex and lengthy process with many governmental regulations and approvals required. As it regards annuitization of the plan obligation, the Department of Labor Interpretive Bulletin 95-1 requires that a plan sponsor use only "safest available" annuity providers to fund pension benefits and, unless they possess the expertise internally, must utilize an expert to provide this capability.

Department of Labor Interpretive Bulletin 95-1

Have a specific question regarding a challenge you are encountering with your pension plan termination or freeze? Ask, and we can help provide you with an answer.

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