DB Freeze No Short-Term Solution, Claim Panelists

July 5, 2006 (PLANSPONSOR.com) - CHICAGO - Andy Steiner knows exactly why many executives at large employers aren't wild these days about keeping an active defined benefit plan in the field: "bad accounting."

“Pension accounting,” declared Steiner, assistant treasurer, Investments, at Motorola, at PLANSPONSOR’s Plan Designs 2006 conference, “is neither stable nor predictable .”  

Plan sponsors also no longer enjoy the “funding holiday” many had in richer years past, and so, they are more willing to consider a plan freeze as a cost-cutting move, Steiner.   Motorola last year instituted a “soft freeze” by channeling new hires into a defined contribution plan (see  Motorola Alters Pension Benefits for New Employees ).

“(DB plans) are a distraction from trying to run their business,” agreed Matthew Henderson, vice president and consulting actuary at Prudential retirement. Additionally, Henderson pointed out to attendees at the “To Freeze or Not to Freeze” discussion that plan sponsors have to get familiar with the complex world of pension accounting – a world that could get even more complex with the looming advent of another set of pension accounting changes from the Financial Accounting Standards Board (FASB) (see  Asset-Liability Matching: Miss Match? ).

Several discussion panel members cautioned that a DB freeze is, at best, a fix that won’t provide a large amount of benefits to the bottom line for many years. Employers won’t start seeing substantive savings until the first new hires – on the DC plan – begin retiring.   “You have a problem with managing your assets and your liabilities that is already out there that a freeze won’t do anything about,” Henderson asserted. Attendees heard several reminders that soft plan freezes still leave companies with their accrued participant benefits and the potential legal and regulatory headaches that come with administering that pot of money.

Declared attorney H. Douglas Hinson, another discussion panel member: “(A freeze) is not a short-term fix and I think that’s a point that gets lost in the discussion.”

Steiner also cautioned that a DB hard freeze – closing the plan altogether – could make it that much harder to keep older workers on the payroll. “The issue is what are you going to do about the retention of older workers because if you terminate the benefits at the wrong time, they (the older workers) will walk. I think a hard freeze is an overreaction to the issue.”