terminating DB Plan and establishing 403(b) plan

[Guest nadiarott]

Company wants to do away with their defined benefit plan due to the expensive nature of maintaining/funding the plan. They will establish a 403(b) plan for their employees, as a new option.

Any advice on the best way to achieve this while keeping the employees happy is greatly appreciated. Also, any comments/concerns with the options that I have come up with is also greatly appreciated.

1. Terminate the DB plan and move everyone to the 403(b) plan - no choice. (not the best choice because ees will likely not be thrilled)

2. Give every ee a choice between remaining in the DB plan or switching to the 403(b) plan (not the best because it may not help company achieve its goals).

3. Provide all ees based on age participation in the DB plan (a sort of grandfathering) and move the rest (and new ees) to the 403(b) plan.

4. All vested ees (with certain age or service amount) could choose - the rest go to 403(b) plan. Must determine the vesting rules.

Of course, my main concern is that the latter two options create some discrimination issues, etc. Any other options that anyone has would be greatly appreciated.

Thanks!

[david rigby]

Before going down that road too quickly, let's be sure a 403(b) plan is available. What kind of "company" is this?

Perhaps you do not specifcially mean a 403(b) plan but (more generically) a defined contribution plan?

[Guest nadiarott]

A 403(b) is definitely appropriate for this company (non-profit organization). But if it is easier to say, generally, a defined contribution plan, that is fine too.

[AndyH]

Giving employees a choice between the two will at some point cause problems under 401(a)(26) 410(b) and 401(a)(4). Plus, I'm not sure if you can even do that without it being considered a CODA. Perhaps you somehow can, but it is a bad idea due to the issues you will face.

The typical answer is an age-based allocation in the DC plan. Another option is a cash or deferred profit sharing allocation based upon an age-weighted PS allocation formula. The particulars would depend upon the DB provisions. Unfortunately, I've been doing a lot of these "replacement plan" studies recently.

p.s. The model replacement, at least a few years ago according to ASPA's C-4 exam material, was a target benefit plan, although I personally happen to prefer a discretionary design such as an age based or tiered DC.

[Guest nadiarott]

What do you mean by an age based allocation DC?

What do company's typically do when they want to move from a db plan to a dc plan? Do they do any sort of "grandfathering" of employees in the db plan while moving others to the dc?

[AndyH]

Typically an organization that wishes to switch from a DB to a DC would freeze benefits and participation in the DB plan. If there is enough money to terminate it, then that is what they would do. If not, the plan can generally be maintained in a frozen state until there is enough money to terminate it.

Either way, a new DC plan is established and everybody goes into it.

Many DC plans have allocation formulas that work similar to the way that employees accrued benefits in a DB plan, that is older employees get more. A target benefit plan, an age-based profit sharing plan, and even a cross tested PS plan all do this to some degree. An age-based profit sharing plan has a different allocation rate for each age. Allocations are based upon points. A point might equal the present value of a pension accrued benefit of $1 at age 65, discounted to the present age. Each employee gets an allocation proportionate to their points. This method can closely reproduce accruals from some DB plans, in particular those of an "annual accrual" or "career average" design.

[Guest nadiarott]

Can you explain to me a statement made previously . . . You said that giving a choice can create a CODA. What does that mean really and what are the consequences of it?

[AndyH]

I am not as well versed in the potential CODA issue as many out there are. Perhaps someone else could chip in on that issue.

[Guest nadiarott]

that would be great.