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Terminating a defined benefit pension plan will eliminate long-term financial and administrative risk. But settling all of the plan’ liability isn't as simple as making the decision to terminate your plan.
Sponsors must work through various stages and complexities to ultimately settle the plan's obligations. And the right provider can make a world of difference by coordinating the process and reducing workload for your team.
In this article, we break down what's required to terminate a plan and what you should expect from a pension termination provider to help you locate the right partner for your organization.
Pension termination involves a series of interconnected steps. While every plan is different, the process generally includes:
Preparation: Establishing the termination strategy, timeline, and responsibilities between all parties.
Data validation: Reviewing and resolving participant and beneficiary data issues. Poor or incomplete data can create problems later in the process, making this an important early step.
Funding: Determining the amount of funding needed to settle the plan's obligations and coordinating the necessary contributions or asset transfers.
Participant and beneficiary work: Identifying participants and beneficiaries and addressing outstanding issues that could affect benefit payments.
Benefit calculations: Performing calculations to ensure participants receive their entitled benefit.
Compliance requirements: Completing the regulatory and administrative requirements associated with terminating the plan.
Distribution and settlement: Distributing benefits through lump-sum payments, annuity purchases or other appropriate settlement methods and coordinating the transition of protected benefits to an insurance company when applicable.
Termination: Completing the final steps required to formally terminate the plan.
All of the activities on this list don't necessarily happen one at a time. Many are interconnected, and delays in one can affect the rest of the timeline. This challenge is compounded if your organization needs to rely on multiple providers at different stages.
The provider you choose can have a significant impact on how much work remains with your organization and how long the process might take. Consider the following.
A termination may involve actuarial, administrative and annuity services, among others. When those functions are handled by multiple providers, the sponsor may be responsible for coordinating timelines, resolving issues and keeping everyone on track.
An integrated approach can simplify that process by putting project leadership in one place. Rather than managing several vendors yourself, look for a provider that can take responsibility for coordinating the major components of the termination.
The right provider should reduce your internal team's workload. Ask what responsibilities will remain with your team, who will manage the project day to day, and how the provider will identify and resolve issues.
Participant data issues, outstanding benefits questions, coordinating different parties, and a variety of other issues can impact your projected timeline. Ask providers to explain their process for identifying potential delays and what they do when an issue arises. The goal is to ensure they have a process for keeping the termination moving if a roadblock does arise.
Participant data is one of the foundations of a successful termination. Incomplete or inaccurate information can create additional work and delay the process.
A strong provider should have a clear approach to reviewing, validating and resolving participant data issues before they become obstacles later in the termination.
Termination can involve significant changes for participants, making clear communication an important part of the process. Ask who will develop, produce and distribute participant communications, how questions will be handled, and how communications will be coordinated with the insurance company when an annuity purchase is part of the termination.
Termination services can vary considerably in scope and cost. Rather than focusing solely on the initial fee, ask what is included and what could create additional costs as the project progresses.
A provider should be clear about the services included in its proposal, the circumstances that could change the scope of work, and how unexpected issues will be handled.
A faster plan termination isn't necessarily cheaper. But completing the process sooner can reduce the time a sponsor remains exposed to the risks and costs of maintaining a frozen pension plan.
Speed can also reduce the amount of time your internal team needs to devote to the project. A provider that takes ownership of the process can allow your staff to remain focused on their primary responsibilities rather than coordinating a complex, multi-vendor project. This doesn't mean sponsors should rush plan termination. The objective is to complete the process while minimizing delays.
For example, October Three's Turnkey plan termination process was designed around the goal of reducing sponsor involvement and streamlining the path to termination. While many firms quote termination timelines of 12–18 months, we have a proven record of completing the regulatory process in as little as 4–6 months.
Plan termination is a complex process, but sponsors don't have to manage every piece of it themselves. The right provider can make all the difference. When evaluating providers, look beyond the initial price. A strong termination partner should help you reach plan termination faster, with less work for your team.
Once you have a provider selected, it's important to understand what you need in place to get started. In our final article, you'll receive a plan termination checklist. Click below to learn more.
Alternatively, if you're ready to jump in now and curious how October Three can help you streamline the termination process, then let's connect. Click below to schedule some time with our team.