GM announced last week that it would freeze pensions for salaried employees. Other large employers, such as Verizon, IBM and Alcoa, also have said recently that they will freeze pensions. The main argument for doing so is to reduce costs and stay financially competitive in industries where other companies are providing 401(k) plans, which typically cost less.
But frozen plans often require as much--if not more--attention than open plans, says James Morris, senior vice president at SEI Investments, an Oaks, Pennsylvania, provider of investment and technology services to plan sponsors.
"Often plan sponsors think they have dealt with their problems by freezing their pension plans, but then they find themselves continuing to pour money into them," he says.
The issue is that companies often continue to manage frozen plans as they did when they were open, consultants say. But managing frozen plans can be more difficult because it’s crucial to match assets and liabilities.
Unlike with growing pension plans, where overfunding can be used to deal with liabilities later, there is no benefit in overfunding a frozen pension plan. "If you have a surplus in a frozen plan, you have effectively put too much money in the plan, and that doesn’t do you any good," says Richard McEvoy, principal and senior consultant at Mercer Human Resource Consulting.
For this reason, companies that freeze their plans need to make sure they line up their actuarial strategies with their investment strategies. They also need to know what they intend to do with their plans. For example, if the goal is to ultimately terminate the pension plan, companies need to manage the assets and liabilities accordingly, Morris says.
Employers also need to make sure they have a well-thought-out communications strategy in connection with the freezing of plans. At the very least, they must alert participants to the freeze 45 days before they take that step, as ERISA requires.
But looking beyond the freeze itself, organizations should create communications that show employees in the plan what their fixed retirement payments will be from the defined-benefit plan, and how investing in the company’s 401(k) plan can add to that, McEvoy says.
Companies also need to communicate with employees about changes they make to their 401(k) plans to encourage investors to participate, says Tom Murphy, divisional practice leader for retirement practices at Watson Wyatt Worldwide.
Employers must consider how a freeze affects employees attitudes. "They need to address the immediate crisis and demoralization that occurs," says Alicia Munnell, director of the Center for Retirement Research at Boston College.
Employers that freeze their pension plans also need to anticipate a change in retirement patterns among older employees, she warns. No longer will workers automatically retire when they reach 65, and many might stay much longer than employers want them to, she says.
"Employees’ exit from the company as they get to retirement age now becomes slippery and unpredictable," she says. "Companies need to think about that."