Is it Time to Terminate Your Defined Benefit Plan?
Defined Benefit Plan Termination
Are you considering freezing or terminating your Defined Benefit (DB) retirement plan? Many retirement plan sponsors have already, or plan to in the near future. From 1980 through 2008, the proportion of private wage and salary workers participating in DB pension plans fell from 38 percent to 20 percent.
For most of these plan sponsors, they have been waiting for interest rates to rise so that the funding levels increase without additional capital. Recent changes could make some plan sponsors rethink waiting much longer.
Consider the following:
Pension Benefit Guarantee Corporation (PBGC) annual premiums for plans are increasing for 2017. These premiums are increasing for single employer plans from $64 per participant to $69 per participant. These premiums are expected to increase annually going forward.
The mortality tables that are used to determine life expectancies have changed and, in most cases, will increase funding costs for plans.
In most cases, if you terminate the defined benefit plan, it will take more than one year once you start the process to get through the Internal Revenue Service and the PBGC clearance.
Termination liabilities are typically higher than your current liabilities for a plan that is active.
It could make sense to look at the cost to maintain the defined benefit plan over the next five years and review if it makes sense to terminate today versus some point in the future. Here is a very simplistic formula to help determine the cost for maintaining the plan:
Simplistic Formula:
Cost of PBGC Premiums
Actuarial cost,
Custodial and investment related costs,
Plan audit costs
Annual expected contributions to the plan
Fiduciary and other insurance costs to maintain the plan
Once you have a five-year projection of the costs above, you can compare that to the termination cost for funding the plan. Please note, this number can and most likely will change from today until you have gone through the termination process.
Waiting for interest rates to rise may not be the best path for analyzing when you should terminate your defined benefit plan taking into account the other costs you may incur waiting for that to happen.