Cost Considerations When Freezing Your DB Plan

Just because a plan is frozen, doesn’t mean fees will go away altogether.

By Amanda Umpierrez | July 31, 2017
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If you purchased a large home when raising a family, would you continue to pay for it once the kids have grown and moved away? For many, it may be worth downsizing to fit a new set of needs and goals. 

That’s the analogy 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 doesn’t mean fees will go away altogether, so a reassessment of needs and services is always in order once a DB plan is frozen. 

According to Gallagher, along with Stu Lawrence, national retirement practice leader from Segal, expenses concerning administration of the plan; actuary and accountant tasks; and Pension Benefit Guaranty Corporation (PBGC) premiums are all still responsibilities sponsors must face when freezing their plans. While most employers outsource plan administration, says Gallagher, others team with providers to tame plan data and answer phone calls concerning benefit accruals. Additional services involve employing actuaries and accountants to evaluate liabilities of pension plans, calculate contributions and audit the plan.

Lawrence notes that while auditing a plan may grow slightly easier as a frozen plan decreases in number of participants, 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.

Those that entirely terminate their plan—which can only occur if an employer pays out the value to the worker in a single sum, or finds an insurance company to stand in 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.

“Once you terminate a plan, and you in effect settle the liabilities, you no longer have to pay PBGC,” says Gallagher. 

According to Lawrence, DB plans can be in one of four stages—ongoing, closed, frozen and terminated. A terminated plan requires that an employer settles the plan obligation with the worker; ongoing plans have participants who are still accumulating benefits as service continues; closed plans, also known as soft-frozen plans, block new participants from entering, yet allow existing employees to resume benefit accrual; and frozen plans strictly disallow all participants from accruing benefits.

“For most, you start with an ongoing plan, you may become a closed plan, a frozen plan, and at some point, you’re going to be a terminated plan,” says Lawrence.

NEXT: A path for DB plan stages