Think Twice Before Freezing DB Plan

Media reports show a trend of plan sponsors freezing their defined benefit plans and moving to or enhancing their defined contribution offerings, but a panel of speakers at PLANSPONSOR's 2006 DB Summit said there are a number of things to consider before jumping on the bandwagon.

conference audio available at  – free registration required 

According to Theodore Economou, Assistant Treasurer at ITT Corporation, there are three types of risks to consider before deciding to freeze a DB plan:

  • Financial risks – This includes market risks, interest rate volatility, employee longevity, retirement patterns of employees, funding rules, accounting rules.
  • Employee relations – DB plans are one of the most powerful employee retention tools.
  • Corporate or employer reputation.

Economou pointed out that freezing a DB plan becomes less attractive when a company realizes the move only provides funding relief over the long term and does not relieve plan liability. He suggested asset management strategies are just as, or more, effective at managing DB plan risk as freezing the plan or changing plan design.

Other panel members noted that a pension freeze is a decision best postponed as now is not generally a favorable time to freeze due to the interest rate environment.  Additionally,  it was suggested that  employers should consider that discrimination issues can become a concern when only older, long-time employees are covered by a frozen plan. That can serve to separate employees into two groups, and younger workers will wonder why they do not have this benefit. Additionally, the lack of a DB plan could hurt employee loyalty or make it easier for workers to leave, and may make it more difficult to attract mid-career job candidates.

Panel member Robert McAree, Senior Vice President and Corporate Retirement Practice Leader at Segal Company, added that frozen DB plans will require a different investment strategy and require more financial analysis going forward. However, as did the other panel members, he suggested employers focus more on the impact freezing the plan will have on employee relations.

McAree said Segal encourages corporations to look at the value employees place on the DB plan and how the plan contributes to employee satisfaction and motivation. He said keeping the DB benefit in place is an opportunity for employers to deliver a strong message to employees about trust and the company’s loyalty to them.

For those that do decide to freeze, employee perception of the value of DB can drive a company’s decision on the replacement for the DB benefit – companies may need to make the new benefit look similar.