DBSummit07: Why, When, and How to Freeze

A funding crisis accelerated the demise of many defined benefit plans in recent years, and some have predicted new funding rules brought on by the Pension Protection Act (PPA) and new accounting rules will lead to the demise of even more.

align=”center”> Audio Recordings of the 2007 DB Summit Are Available Here

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Panel members at PLANSPONSOR’s 2007 DBSummit in Washington, D.C., pointed out the decision to freeze a DB plan should not be made in haste. As panel member Noel Boyland, Senior Vice President at Sibson Consulting, said, “When clients come in with the decision made, our job is to pull back and ask, ‘What are your problems?'”

One question sponsors should ask before deciding to freeze, according to Boyland, “Is a pension plan the appropriate form of compensation or reward we need to attract, retain, and motivate the key talent needed for our success?” Boyland said if the organization is very reliant on mature workers or if there is a shortage of new talent in the industry, then a DB plan makes sense.

Demographic Shifts

In addition, Boyland advised sponsors to consider how their employee demographic will change in the next two to three years – looking at such things as employee age, years of service, and number of retirements expected. Sponsors might also consider the benefit preferences of the employee population, broken down by different talent segments – high performers versus low performers, Boyland offered.

Marvin Stokes, Sr., VP, Retirement Practice, Aon Consulting, said understanding what the business is trying to do is a key component in the decision of whether to freeze a DB plan. Stokes suggests putting benefit accruals and the financing of the plan into strategic terms for the company, and discussing with plan sponsors the options that work best for the company’s strategic plan.

Panel member Diane Godding, Human Resources Manager at Fairfax Water, conceded that a DB plan is a good way employers can give employees incentive to stay, but said companies should consider the financial effects and appropriateness of a DB plan. With the increased life span of workers, an employer's original intent to provide income and health care to employees for life could be financially draining for the employer.

However, Godding said, a DB plan is seen as an implicit deal with employees, and if the employer changes the deal it risks employees leaving or a decrease in employee morale and productivity. Consequently Godding advised against a hard freeze - where benefit levels are frozen for current workers - unless a sponsor's "back is against the wall."

Freeze Components

During the decision-making process, it is important to get a company's board of directors to understand the components of the freeze process and what issues a plan freeze would solve for the firm, Boyland said. Stokes added that education meetings with the board and any other decision makers should be held to get rid of biases and misunderstandings.

Once the decision is made to freeze, sponsors need to decide how they will communicate the decision to employees. Stokes told audience members that employees should be told exactly what will be done, what it will mean to them, and why the employer decided to do it.

Finally, Stokes warned that sponsors should understand freezing the DB plan will not make the work of keeping up with the plan go away or fees go down, and sometimes fiduciary reviews get neglected (See Study Warns DB Plan Freezing Doesn't Mitigate All Risks). In addition, Stokes said, if there is a hard freeze, the next step is often plan termination, so sponsors should be prepared with clean data and by investing funds strategically to improve the funding status.

"[Plan] management ought to be more intense in anticipation of [plan] termination," Stokes said. He added that many employers do not want to do this, and outsourcing should be considered.

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