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Plan Termination Services
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 P-Solve’s 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 P-Solve has defined based on our years of experience helping plan sponsors succesfully 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.
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.
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.
Click on the buttons below to learn more about the plan termination annuity purchase process!
Selecting an annuity provider for any type of pension plan annuity purchase is a fiduciary responsibility that the plan sponsor must take very seriously. In 1995, the Department of Labor published Interpretive Bulletin 95-1, which “provides guidance concerning certain fiduciary standards … applicable to the selection of an annuity provider for the purpose of benefit distributions from a defined benefit plan … when the plan intends to transfer liability for benefits to an annuity provider.”
Commonly referred to as DOL 95-1, the bulletin explains that selecting an insurer to transfer benefit liabilities is a fiduciary decision (this point is also reiterated in the new DOL fiduciary regulations). As such, plan fiduciaries must act in the best interest of plan participants in selecting the insurer that can provide the “safest annuity available.” DOL 95-1 also requires that plan fiduciaries “conduct an objective, thorough, and analytical search for the purpose of identifying and selecting providers from which to purchase annuities.”
The DOL’s 95-1 procedures provide a framework for fiduciaries to evaluate potential insurers capable of providing the safest annuity available. The framework consists of:
•Conducting an objective, thorough, and analytical search
•Evaluating a number of factors related to an annuity provider’s claims paying ability and creditworthiness
•Relying on insurance rating agency services not being a sufficient analysis
It should be noted that after a fiduciary has gone through their due diligence they may conclude that more than one insurer is able to offer the safest annuity available.
Meeting the DOL 95-1 standards is a critical part of the process of selecting the annuity provider.
Selecting an annuity provider is a fiduciary responsibility, which means the sponsor must be prudent in the process they undertake. Since almost all sponsors do not have the expertise to execute a proper process, prudence requires that the sponsor employ a partner in helping them execute an appropriate process. Not all service providers are created equal in the annuity purchase space. It will be important for the plan’s fiduciaries to select a provider that will give them a fair price and help them reach the appropriate conclusions from the analysis. One specific consideration is whether or not your provider will act as a co-fiduciary. This is a key distinction, and one that warrants attention. A co-fiduciary will be more thorough in their due diligence of the insurers since they will also be on the hook if anything were to go wrong with the process of selecting the safest annuity available.
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.