Plan termination is the culmination of the life of a pension plan with the ultimate event of paying out benefits to your participants. Before you can get to that final payout, however, there are three key stages plan sponsors go through; preparation, implementation, and distribution. First, sponsors should take the appropriate steps to assess and improve the plan’s readiness to terminate. Second, once a plan is ready, a standard plan termination can be implemented. The implementation stage takes 9 to 15 months and involves regulatory filings and participant communications. Finally, the third stage ends the termination with the distribution of assets and likely a PBGC audit. Achieving a successful outcome greatly depends on the work performed getting ready for plan termination.
Plan Termination | Preparation
There are four critical readiness areas plan sponsors need to assess before implementing a plan termination: funded status, funded status risk, plan administration, and data quality. Preparing for a successful plan termination takes time and effort. Neglecting any of the critical areas can jeopardize achieving a successful plan termination.
Gain Clarity with a Readiness Assessment
With River and Mercantile Solutions’ Plan Termination Readiness Assessment you can effectively answer the question of “How prepared am I to start my plan termination journey?” A team of plan termination experts will analyze your entire plan within the four critical areas that River and Mercantile Solutions has defined based on our years of experience helping plan sponsors successfully terminate their plans. The assessment will demonstrate how ready your plan is to begin termination, highlight any areas in need of attention, and provide recommendations on next steps.
The plan’s funded status on a plan termination basis is different from the accounting or funding bases sponsors wrestle with each year. Understanding the true cost to terminate is critical to knowing how close you are to “the end”. It’s also important to understand the potential financial reporting impact due to fully settling liabilities, which will differ under various accounting standards.
Funded Status Risk
Every defined benefit plan faces a myriad of risks that can affect the funded status, including changing interest rates, volatile investment markets, demographics, and regulatory changes. During the life of the plan, these risks provide opportunity to plan sponsors. But, as the plan nears full funding, these risks need to be brought down and eventually eliminated. If they are not, sudden changes in interest rates or stock markets can set you back years on the road to termination. Understanding the plan’s risks and how these risks will be managed is critical to preparing for plan termination.
Defined benefit plan administration is complicated and includes many facets (e.g. forms, notifications, and plan documents). These facets will all come under scrutiny by the regulatory agencies as part of the plan termination process. Almost all plans have at least one minor issue that needs to be addressed. Minor issues can create major headaches if they are found during the plan termination process, rather than before. Major issues can stop a plan termination.
There is a lot of data needed to successfully carry out a plan termination. Ideally, plan sponsors will have all of the pieces (e.g. pay and service histories) that were used to calculate benefits, complete census information, beneficiary data and every participant’s current address. Compiling any missing information will take a lot of time and effort and should be done before starting the termination process.
The dashboard above is a sample summary that a plan sponsor would receive once the plan has gone through a readiness assessment by one of River and Mercantile Solutions’ plan termination experts.
All good things must come to an end, and the end for every defined benefit plan that is closed to new participants, or has frozen benefit accruals, is settling its liabilities in a plan termination. The challenge facing plan sponsors is understanding when termination will
occur and what needs to be done leading up to that final day. In other words: what do frozen plan sponsors need to do to make “the end” a good one?
Download this article to learn about the four critical areas plan sponsors need to assess so they can plan for a smooth termination.
Plan Termination | Implementation
The process of implementing a standard plan termination is filled with regulatory filings, participant notices, and numerous deadlines. It is important to complete these tasks timely and correctly.
To discuss with one of our plan termination experts about the implementation process please contact us below!
Plan Termination | Distribution
Upon successfully completing the implementation stage of a plan termination, lump sum payments are ready to be paid to participants who made an election. Once paid, the only remaining participants in the plan are the in-pay participants (e.g. retirees and beneficiaries) and the not-in-pay participants who did not elect a lump sum payment (deferred annuitants). The sponsor will purchase an annuity from an insurance company for these remaining annuitants. The selection of the insurer is a critical fiduciary decision.
To learn more about the plan termination annuity purchase process, click below!
Why River and Mercantile Solutions?
At River and Mercantile Solutions, our team of actuarial and investment professionals are uniquely qualified to help plan sponsors through the plan termination process. With our staff’s understanding of the specific requirements of implementing a plan termination and our consultative approach to managing both the liability and asset sides of the funded status equation, we are able to successfully navigate all aspects of a plan termination. Our long history of helping sponsors achieve effective and efficient terminations speaks for itself.
As part of the termination process, we also routinely sign on as a co-fiduciary with the plan’s fiduciaries in selecting the safest available annuity provider. Our analysis is detailed in a comprehensive report which documents the key criteria in selecting the annuity provider as required by the Department of Labor in their Interpretive Bulletin 95-1 (selecting the safest available annuity provider). We also have detailed information that we collect regarding each insurer’s on-boarding process, their investment structure, the enterprise risk management structure of the company, and experience and administrative capabilities.