Just because a plan is frozen doesn’t mean it is dead. Here is how to deal with responsibilities after the fact.
Every morning lately, it seems that there’s news of another pension plan freeze. The auto, airline, and other industries facing tough financial times cite the financial challenges their defined benefit plans pose and the need to control their exposure. But companies in healthier industries—including telecommunications, finance, and information technology—offer plenty of reasons of their own, including volatile program costs, an uncertain legal environment, changing competition and workforce characteristics, plus rising healthcare costs that consume an ever-larger share of the benefits budget.
So let’s assume you’re responsible for administering a frozen pension plan. What should you be doing going forward? I have several suggestions.
• Do not regard the frozen plan as an “albatross” from an employee communications perspective, regardless of the concerns that led to the freeze decision. Unless your plan was terminated in a distress situation, the value of benefits accrued to date (including early retirement subsidies earnable in the future) is preserved.
For many employees, these preserved benefits will be a significant source of retirement income for years to come. Certainly the freeze is a matter to be handled carefully, but always be sure to refer to plan benefits earned to date in future retirement program communications, statements, planning tools, etc.
• Maintain or even increase employees’ awareness of the frozen pension plans. Why? Because the value of these benefits is so important to employees and represents a significant financial investment that the employer made in the past (and likely will in the future as well).
Consciousness-raising may seem counterintuitive in that the plan’s frozen status may seem to diminish its value, but it has to be done. Benefits under defined contribution plans will play a greater role in most employees’ retirement. Notwithstanding—or maybe because of—this fact, the role that benefits from these frozen pension plans will play in an individual’s overall retirement income picture should not be minimized.
• Don’t overlook compliance requirements. Valuation, accounting, communication, IRS filings, PBGC premiums, and all other ERISA requirements remain. Even though accruals are frozen, tasks such as nondiscrimination and coverage testing are still necessary. Satisfying these requirements may become problematic as active participants age and retire. Further, carrying out compliance duties will likely become trickier as organizational memory of the frozen plans fades.
• Evaluate your investment policy in light of your intentions for the plan. Although the duration of your liabilities will be changed by the freeze action, your investment policy and overall funding philosophy should reflect your intentions toward the plan as a whole. Sponsors who ultimately look towards winding down the plan and terminating it through an annuity purchase arrangement need to formulate a way to monitor funded status and plan contributions. They (and their consultants) also should keep tabs on the interest rate and annuity marketplaces for appropriate wind-up opportunities.
• Complete the calculation of accrued benefits (or component pieces) now. Do it for all employees and former employees entitled to future benefits under the frozen plan. This means capturing and scrubbing at one time all the data that affect benefits. Although in ongoing plans the importance of “gaps” in historic data diminishes over time, that’s not true with a frozen plan. Typically the data, as they exist now, will be used to calculate benefits for everyone. Over time, the ability to resolve issues that arise because of data gaps will decrease. This means that time spent today finalizing (and communicating) frozen benefits will be time well spent.
So, although some employers have chosen and other employers will choose to freeze their defined benefits plan, administrators, plan sponsors, and benefits professionals who deal with these plans are likely to face significant responsibilities for many years to come.
