2012 could be a big year for pension plan terminations, according to Vanguard Strategic Retirement Consulting. Many sponsors of frozen defined benefit plans are considering terminations because the Pension Protection Act of 2006 reduced regulatory stumbling blocks related to offering lump-sum payments.
If you are considering closing a DB plan, you must figure out a way to make the transition easier for employees. Vanguard recommends putting in place a well-planned participant strategy that includes clear, timely communications; participant access to objective advice; and possible enhancements to your existing defined contribution plan.
If your plan already is frozen, its termination will have little financial impact on participants, but their concerns should be carefully considered. In addition to sending any required notices about the closure, you will want to tell participants why you are terminating the plan. Be clear about the financial or other implications for participants.
Recommended For You
Vanguard recommends communicating with participants early on, or as soon as you've made your decision. Then share a timeline of upcoming events that affect participants. If a plan freeze is happening at the same time, be open and direct about the reasons for this action. If a plan freeze has already happened and been communicated, clearly distinguish between a freeze and a termination and assure participants that the termination is a formality of little financial significance.
When a pension plan is closed down, participants will face a choice between taking a lump-sum distribution or keeping the annuity options that the plan provides. This can be overwhelming and confusing so Vanguard recommends giving participants access to a Certified Financial Planner who can discuss the pros and cons of every option and help participants make better decisions about their money.
If you have a DC plan, make sure it accepts rollovers. This can help ensure that participants' assets continue to be set aside for retirement if they choose to take a lump-sum distribution.
© 2025 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.
