What are many sponsors of frozen DB plans going through right now? First, they likely lack a clear termination strategy. And service providers generally can't help them throughout the entire spectrum of the termination process.

Plan sponsors often aren't prepared to execute a termination once the plan is fully funded. Even if the market and interest rates rebound, there are a lot of moving parts to effectively execute a plan termination—from gathering and verifying accuracy of participant data, to proper disclosures, to the final distribution of assets.  

They're also are generally worried about interest rates. Sponsors of frozen DB plans are anxious to get the plans off their books. But they continue to feel financial pain, often with no clear end in sight due to low interest rates and volatile equity markets. Based on our experience, a one percent change in interest rates, for example, can cause a 12 to 15 percent change in liabilities for the plan. That can result in big unwanted surprises to an organization's financials.

Key steps in the termination process

First and foremost, a successful plan termination requires a coordinated effort.  It's critical that the plan sponsor, financial professional or consultant, actuary and other retirement plan service providers all work together within a shared plan.  

Based on our experience and research, that plan should include:

1. Developing a termination strategy by evaluating cost, funding strategies and the impact of asset allocation
2. Effective execution of a Dynamic Asset Allocation strategy
3. Efficient administration of the plan termination process
4. Final risk transfer—distribution of assets to settle obligations

Not surprisingly, the process is complex and somewhat lengthy. It also involves compliance with a variety of government regulations. It's important to work with service providers who have extensive DB expertise.  A white paper series from The Principalis a resource that can help you and your clients through the process. Best Practices for Building a Termination Strategy and Best Practices for Executing a Termination Strategy take plan sponsors and their financial professional or consultant from development of a termination strategy all the way through the distribution of participant assets.

Prospecting for clients with frozen DB plans

This opportunity is unique in that it can be approached from the finance side through the chief financial officer versus the human resources side. Developing a clear exit strategy is typically a high priority for CFOs. They're motivated because of the far-reaching impact of the frozen plan on the financials of the organization. 

Another area of opportunity lies with smaller DB plan sponsors (between $10 million – $100 million in plan assets). These smaller plan sponsors may not always get as much attention and services as larger plans. 

This lower service level can result in a disconnect between the assets and liabilities—an issue that's critical to an effective plan term strategy. This is an area of opportunity for you to help bring these key areas together via an investment strategy prepared in collaboration with an actuarial assessment of the liabilities. 

Help clients achieve a smoother process

Terminating a DB plan can be time-consuming and complicated. Working with experienced service providers, you can differentiate yourself in this potentially lucrative market—and provide a valuable service—helping plan sponsors smooth out the process.