Don’t Let Your Frozen Pension Plan Leave Participants in the Cold
Is your DC plan ready for your pension plan’s termination?
For sponsors of frozen pension plans, the DC plan becomes an increasingly important source of retirement income for many of your employees, and perhaps the sole source for a growing number.
Therefore you need to make sure your DC plan is prepared to move from a supporting to a lead role.
This post offers four suggestions for preparing your DC plan for its big moment.
First, make sure that your DC plan document allows for “rollovers” in. Pension beneficiaries will be forced to move to a potentially higher cost individual account or, worse, take a taxable and penalty-incurring lump sum distribution if they are unable to transfer, in the form of a rollover, their untaxed DB benefit to their DC plan. Confirm with your recordkeeper that rollovers in are permitted. And if not, change your plan document to allow them.
Second, pension beneficiaries have received professional advice, actuarial services, and institutional investment and custody pricing from your pension. While no longer conveniently bundled for them, most DC plan providers do offer investment advice, retirement income estimates, and low cost institutional investment options to 401(k) plan investors. Ask your 401(k) investment consultant for assistance obtaining institutional quality and institutionally-priced investment options and investment advice, and for assistance in developing or evaluating the right measure of retirement readiness for your plan’s participants.
Third, pension beneficiaries may need periodic access to rollover balances, or regular access through fixed dollar or fixed percentage installments. Most recordkeepers offer partial withdrawals and installments to retirees at no cost. You usually have to ask your recordkeeper to turn these features on.
Fourth and lastly, your plan’s investments should be as friendly to retirees as they are to younger, growth-seeking investors. This means adding more stable asset classes, such as a high quality bond manager to your plan’s lineup; offering inflation-fighting investments, a vital asset class for retirees, such as Treasury Inflation Protected Securities or TIPS; and reevaluating your target date funds, since a higher-risk manager may not be appropriate for retirees and near retirees.
Your DC plan is not a perfect substitute for the security of a pension. But it can probably be made better.
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