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Your DB plan is frozen … what should you do next?

In 2023, 24% of civilian workers had access to defined benefit plans, including 15% of private industry workers and 86% of state and local government workers. Within the private sector, many organizations have abandoned the DB plan in favor of a Defined Contribution plan model and other employee savings vehicles such as Flexible Spending Accounts and Health Savings Accounts — each having its own plan rules and subject to applicable regulations. 

Many organizations and HR leaders are looking at DB plan freezes as an avenue to minimize risk in terms of plan expenses and investment volatility over the short- and long-term. Freezing your DB plan is typically the first step in the lifecycle to plan sunset. 

Here are five important actions to consider when you put your plan on ice.

  1. Factor in your ongoing risk

If you’ve made the decision to freeze your DB plan for all future benefit accruals (“hard freeze”) or just to new entrants (“soft freeze”), it’s important to understand that this may result in immediate cost savings and reduced risk— but you’ve still got skin in the game. For both hard and soft freezes, increases in liabilities due to pay and service are significantly reduced or ceased altogether — but overall pension risk is still a factor.

As a plan sponsor, you still face the administrative costs (including PBGC premiums), associated investment risk, inflation risk and potential funding volatility associated with the legacy pension liabilities which continue to grow on your balance sheet.

  1. Plan on plan maintenance

Freezing your DB plan doesn’t free you of plan maintenance responsibilities. While this may be considered the twilight phase of the plan’s lifecycle, a frozen plan still requires time and attention — such as providing services to participants on their way to retirement, and offering various types of settlement payouts. Plan sponsors at this point in their plan’s life cycle should also spend some time developing a cost-effective and efficient exit strategy.

  1. Clean up your data

Many plan sponsors have chosen to freeze their DB plan(s) because of funding or other financial or administrative factors. To reduce these ongoing administrative expenses and to prepare for the plan’s final stage, it’s important for plan sponsors to cleanse all plan participant data and certify all frozen accrued benefits. This will allow for full automation of calculations with no manual intervention. It will also prepare you for any Terminated Vested Lump Sum (TVLS) programs, de-risking annuity purchases or eventual plan termination.

  1. Adopt best practices to streamline administration

If you haven’t already, now is an ideal time for plan sponsors to adopt best practices including things like standard communications templates and data interface file layouts (for actuarial valuations, demographic data, government filings and pension payroll).

You can also streamline by implementing integrated self-service tools and resources that provide easy access to retirement including electronic notifications and online elections. While participant inquiries may be reduced, you’ll still need call center support. Consider reducing your call center staff to a point where you can maintain service levels while realizing overhead cost savings too.

Looking forward
Freezing your DB plan(s) may be a good strategy for offloading risk and reducing overall costs. But there is still plenty of work to do, while you consider the plan’s future and maintain existing accounts and assets. You may want to consider offering a TVLS window to further shrink plan risk.

Conduent can help you sort through your options and implement a pension de-risking plan that aligns with your organization’s strategy and goals. Learn more about our wealth and retirement solutions and more ways to reduce your HR and benefits program risk.

About the Author

Don Saccente is Conduent's Defined Benefit Director, Center of Excellence. He has more than 35 years of experience in Retirement/Defined Benefit administration, consulting and outsourcing, with expertise in process, product, plan design, communications and compliance.