Have You De-risked Your Defined Benefit Pension Plan This Year?

Have you considered a de-risking strategy for your defined benefit (DB) pension plan this year? In this higher interest rate environment, now is the time to take action.

As a plan sponsor, you’re responsible for funding all plan benefits, absorbing asset losses, and covering ongoing administrative fees. Fortunately, you have options to reduce — or even eliminate — these risks and costs. Two of the most effective strategies are offering lump sum payouts to plan participants or transferring liabilities to an insurance company through an annuity purchase.

Why De-risk Now?

Higher interest rates have created a unique window of opportunity for DB plan sponsors. Here’s why acting now makes sense:

• Lump sum payouts are more cost-effective: As interest rates rise, the value of lump sum distributions decreases, allowing you to settle liabilities at a lower cost.
• Annuity purchases are more affordable: Insurance companies can offer better annuity pricing thanks to higher bond yields, resulting in potential savings for plan sponsors.
• Potential for financial gains: De-risking transactions can drive gains to the pension plan and the plan financials.

Lump Sum Window

A lump sum window is a popular de-risking approach that provides eligible participants with a one-time opportunity to take their benefit as a lump sum. Typically available to all participants, excluding active employees under age 59.5, this strategy gives participants two choices:

• Take the lump sum in cash and pay income tax on the distribution; or
• Roll over the lump sum into an IRA or another qualified retirement plan to defer taxes.

This process can often be completed within three to five months and is generally well-received by participants seeking flexibility and control over their retirement assets.

Annuity Purchase

In addition, DB plan sponsors can transfer pension obligations by purchasing a group annuity contract from an insurance company. Recent increases in bond yields mean insurers are offering attractive pricing for these transactions. For plan sponsors, an annuity purchase is a seamless process that often requires no special government filings or participant notifications and can be finalized in as little as three months.

De-risking with CBIZ

Both de-risking options can lower ongoing fees and reduce risk. However, they may have implications for your financial reporting, including settlement accounting and balance sheet impacts. It’s essential to work closely with your plan actuary, investment advisor, and legal counsel to ensure you understand the full impact before proceeding.

At The Retirement & Investment Solutions practice of CBIZ, Inc., our experienced team is here to guide you through each step of the de-risking process — from evaluating your options to implementing your chosen strategy. If you’re ready to reduce your pension plan risk and take advantage of today’s market conditions, contact us to learn how we can help. Connect with us today to learn more.

Investment advisory services provided through CBIZ Investment Advisory Services, LLC, a registered investment adviser and a wholly owned subsidiary of CBIZ, Inc.

Third-party administration, actuarial, and other consulting services offered through CBIZ Benefits & Insurance Services, Inc.