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Terminating a defined benefit pension plan is a significant project. Before moving forward, plan sponsors need to know what steps will be required and what resources will be needed to complete the process.
This checklist provides a high-level roadmap to help sponsors assess their readiness for plan termination and identify the major steps involved. While every plan is different, understanding the process upfront can help sponsors avoid delays and keep the termination moving forward.
Plan termination affects multiple areas of the organization. Before beginning the termination process, make sure the organization is aligned and understands what's required to complete it.
Identify the people who will need to participate and establish who will be responsible for key decisions. It is also important for key stakeholders to understand the potential financial impact of terminating the plan.
If you're preparing for a termination, you've likely already confirmed your plan is ready.
A fully funded plan has enough assets to satisfy the plan's obligations and complete the termination. For these plans, the challenge can be the internal workload required to execute the termination.
However, if the plan is underfunded, but you're still working toward termination, you'll require a different approach. First and foremost, a strategy to reach funding is required. That could involve additional contributions, adjusting investments, or a combination of both.
For an underfunded plan, a Plan Wellness Check can help clarify your options, including costs, opportunities, and risks as you develop your termination roadmap.
Once your team is prepared, establish a strategy for reaching and executing termination. Depending on the plan, that strategy could include:
Getting clear on costs: Understand the expected cost of termination and how those costs could change over time.
Managing risk: Identify areas of the plan that remain exposed to volatility and determine whether that risk can be reduced.
Adjusting the investment strategy: Make sure the plan's investment strategy supports the termination timeline and objectives.
Evaluating plan-specific considerations: For cash balance plans, for example, sponsors may need to consider the volatility created by the plan's interest-crediting approach and whether changes or hedging strategies could help.
Termination generally moves through six phases.
The process begins with gathering the information and documentation needed for termination. This can include plan documents, summary plan descriptions, and participant data. Sponsors may also need to address data hygiene, including census-data accuracy, locating missing participants, conducting a death audit, and preparing required plan amendments and notices.
Next, sponsors need to prepare participant communications and calculate benefits. This can include calculating available benefit options and lump-sum amounts and developing election packages and required notices.
The termination process also involves required government filings and participant notices. Depending on the plan, these may include the Notice to Interested Parties, Notice of Annuity Information, Notice of Plan Benefits, an IRS determination letter filing, and the PBGC Standard Termination Notice.
For participants receiving annuity benefits, the sponsor will need to complete the annuity placement process. This can include developing bid specifications, conducting a market RFP, evaluating bids, performing due diligence, selecting the annuity provider, and transferring the required premium.
The final stages include receiving the necessary approvals, completing participant elections and distributions, and finalizing the transfer of benefits. Depending on the plan, this can include the IRS determination, PBGC review, lump-sum payments, post-distribution certification, and the first annuity payments to retirees.
Termination does not mean participant questions will stop. Sponsors should plan for continued communication and support at each phase. This can include reminders about important deadlines, assistance in understanding distribution and election options, and access to support resources.
This list offers a general overview of the main phases and requirements of plan termination. The exact timing and responsibilities will vary by plan and by the sponsor's internal capabilities. For sponsors looking for a more detailed roadmap, our Plan Termination Checklist offers a more comprehensive look at the steps involved.
Having a plan is important, but even the most well-structured plan can run into delays. Below are three common issues that can lead to a longer termination process and extend the time your organization remains exposed to risk.
Incomplete Data: Accurate participant data is a foundation of the termination process. Records may require additional work, delaying requisite steps. Addressing this issue early can prevent bottlenecks later in the process.
Poor Coordination: Plan termination involves many moving pieces. Without the right support, coordinating different vendors can fall on the plan sponsor, leading to delays and additional work for your team. Selecting the right partner takes the responsibility of coordination off your team and can increase the speed of the termination.
Starting Late: It can be difficult to estimate the amount of preparation required before a termination begins, especially for larger plans. Starting with data cleanup early can help sponsors identify gaps and address issues beforehand.
Plan termination involves many vendors and moving parts. But your organization does not need to handle termination on its own.
October Three can provide support throughout the termination process. And with integrated services, we can tackle termination in a fraction of the time. Whether your plan is fully funded and ready to move forward, the right support can help clarify the next step and help you reduce plan risk.
Ready to get started? Click below to schedule some time with our team today.