Termination Funding

[Guest LLandau]

Not-for-profit ("NFP")wants to terminate its underfunded DB plan (estblished several decades ago). NFP wants to do this AS SOON AS POSSIBLE because it is weary of the responsiblities and wants to focus on DC Plans.

NFP already has a 403(B) plan that was established some years ago.

NFP understands that it must bring the DB plan up to a fully funded status before it can be terminated, but would like to freeze the plan in the meantime.

The distribution options available to employees through the DB plan include both/either annuities and lump-sum payments.

The NFP understands that a termination contract may be an option...... is this true? Does this seem to be a viable solution even with lump sum payments as a distribution option?

In addition, is there any way to freeze the plan for a certain period of time so that evenually the NFP will not have to make additional contributions?

This is a charitable NFP without a great deal of $.

Thank you for any assistance.

[david rigby]

Sounds like an immediate amendment to freeze the plan would be useful. Suggestion: the amendment which does the freeze should specifically freeze benefit accrual service (whatever name the plan uses), the benefit amount, and participation.

Vesting service cannot be frozen, so participants will continue to vest as they earn additional vesting service.

The plan can remain frozen for as long as needed.

The options available upon plan termination will be based on the terms of the plan. Unless the plan specifies otherwise, the termination could be provided by the purchase (by the plan) of one or more annuities. This may or may not be less expensive than providing individual lump sums.

[MGB]

"In addition, is there any way to freeze the plan for a certain period of time so that evenually the NFP will not have to make additional contributions? "

Freezing does not reduce the level of contributions in the future to be less than what they would owe terminating it now. Actually, if all assumptions are realized, the amount of funding in the future will be greater (it increases each year by interest and mortality).

The only way that putting off the funding will reduce the funding required is if the fund earns more during that time than the discount rates being used to compute the current values. (Or there are large gains such as deaths of participants with large benefits coming without large death benefits.)

The biggest concern is whether your current underfunded status is being calculated with the same assumptions as the lump sums. If you are looking at unfunded based on an actuarial valuation using an interest rate higher than that used for lump sums, the actual amount required to terminate the plan might be much greater.

A group annuity from an insurance company can be bought that allows lump sums in addition to annuities (insurance companies don't like to do this, but some will). They will price the entire contract as if everyone took the lump sum. This will actually cost more than the calculation in the prior paragraph because there needs to be administrative costs and profit added on top of the lump sum calculations. Therefore, offering the lump sums to participants upon termination of the plan (they can roll over) is typically less costly than transferring these to an insurance company.