Plan Sponsor Guide To Frozen Defined Benefit Pension Plans

Defined benefit pension plans have long served as a cornerstone of retirement security for American workers, promising predictable income in retirement based on salary and years of service. Yet, over the past two decades, a notable shift has taken place: more employers are choosing to freeze these plans, fundamentally altering the retirement landscape for both organizations and their employees. The decision to freeze a defined benefit plan is never taken lightly—it’s a move with far-reaching implications for cost control, liability management, regulatory compliance, and workforce relations.

For plan sponsors, navigating a plan freeze is not simply a matter of closing the books on future benefit accruals. It requires a thoughtful, strategic approach that balances organizational objectives with the legal and ethical responsibilities owed to plan participants. From maintaining ERISA compliance and updating plan documentation, to managing ongoing funding requirements and communicating transparently with employees, sponsors face a complex web of duties—each with its own risks and opportunities.

This guide provides a clear, actionable roadmap for HR leaders, finance teams, and executives tasked with overseeing frozen defined benefit pension plans. Inside, you’ll find expert definitions, an exploration of the motivations behind freezes, and a practical breakdown of compliance steps and administrative obligations. We’ll address the nuances between hard and soft freezes, outline communication best practices, and offer insights into funding, risk management, and plan termination strategies. Whether your organization is considering a freeze, managing an existing one, or preparing for plan termination, this resource is designed to equip you with the knowledge and tools needed to make informed, confident decisions—and to support your participants every step of the way.

Understanding Frozen Defined Benefit Pension Plans

Defined benefit (DB) pension plans promise retirees a steady, pre‐determined income based on a formula—usually tied to salary history and years of service. Employers fund these plans by making regular contributions into a trust and investing those assets to meet future obligations. Unlike defined contribution plans (for example, 401(k) accounts), where employees’ retirement income depends on account balances and market performance, a DB pension shifts investment and longevity risk onto the sponsor.

Freezing a DB plan doesn’t mean winding it down completely—that’s a termination. Instead, a freeze suspends or limits future benefit accruals while preserving the benefits participants have already earned. Sponsors must still meet funding requirements, manage investment assets, and comply with ERISA rules. For plan participants, vesting credits continue and accrued benefits remain intact, even though no new pension service is being earned.

What is a Defined Benefit Pension Plan?

A defined benefit pension plan guarantees a lifetime payout upon retirement. The benefit typically follows a formula:

Years of service × Final average salary × Benefit multiplier
Employers contribute to a trust fund with the goal of matching assets to liabilities over time. The plan’s actuary calculates required contributions based on assumptions about investment returns, employee turnover, and mortality. When properly funded, the DB plan can deliver reliable income for retirees without further action from participants.

In contrast, defined contribution plans assign individual accounts to each worker. Employees (and often employers) make contributions, which are invested in funds selected by the participant. The eventual retirement benefit depends on how much is contributed and how investments perform. With a DB plan, the retiree’s payout is predictable; with a DC plan, the payout is uncertain.

What “Frozen” Means in a DB Context

When a sponsor freezes a DB plan, it either halts all future benefit accruals (a hard freeze) or stops new hires from joining while continuing accruals for existing employees (a soft freeze). In both cases, the pension benefits participants have already earned stay in place and continue to vest according to the original schedule.

You may have seen questions like “What happens when you freeze a defined benefit plan?” The answer is straightforward: participants no longer earn additional pension credits after the freeze date, but their existing benefits remain safe and continue to grow with any cost‐of‐living adjustments built into the plan.

Key Statistics on Frozen DB Plans

The Bureau of Labor Statistics provides a snapshot of frozen pension prevalence and duration:

Among private industry workers with DB plans in March 2023, 41% of frozen plans had been in place for 11–15 years; 33% had been frozen for more than 15 years.
The median time since plan freezes took effect is 14 years for private industry and 12 years for state and local government plans.
Hard freezes affect 22% of nonunion plan participants versus 4% of union members; soft freezes are more common among union participants (15%) than nonunion (28%).

These figures underscore that freezing a DB plan is often a long‐term change rather than a temporary measure. Sponsors and participants alike should be prepared for the implications of a multi‐decade freeze when evaluating funding strategies, communications, and future plan design.

Why Plan Sponsors Choose to Freeze DB Plans

Freezing a defined benefit pension plan is a significant strategic choice that reflects a sponsor’s need to balance financial stability, business objectives, and fiduciary responsibilities. Sponsors typically weigh three broad categories of motivations—financial drivers, corporate strategy, and regulatory pressures—when deciding to halt future benefit accruals. Understanding these factors can help sponsors anticipate challenges and structure their plan freeze to meet both organizational goals and participant expectations.

Financial Drivers Behind Freezing

Volatility in pension funding often tops the list of concerns. According to a 2010 Government Accountability Office report, 72% of large-plan sponsors cited volatile contribution requirements as a primary reason for freezing, with 69% pointing to unpredictable funding levels as a close second. In a low-interest-rate environment, the present value of plan liabilities rises sharply, driving up required contributions and straining cash flow. By freezing benefits, sponsors can cap future liabilities and gain more predictable budgeting for their obligations. This control can be particularly appealing when market returns fall short of actuarial assumptions or when employers face competing capital demands.

Corporate and Strategic Considerations

Beyond financial relief, plan freezes often align with broader corporate moves. Mergers, acquisitions, or spin-offs—each accompanied by due diligence and risk reassessment—can trigger a reassessment of pension obligations. Freezing a DB plan simplifies integration of benefits across entities and reduces the risk of legacy liabilities overshadowing transactional value. Meanwhile, many organizations are shifting toward defined contribution plans to bolster their recruitment and retention package. A robust 401(k) offering, with features like auto-enrollment and matching, can be marketed as a flexible, portable alternative that appeals to a more mobile workforce.

Regulatory and Fiduciary Pressures

Sponsors also face mounting fiduciary scrutiny under ERISA and oversight by the Pension Benefit Guaranty Corporation (PBGC). Underfunded plans expose sponsors to potential excise taxes, personal liability claims, and higher PBGC premiums. Recent legislative attention has sharpened the focus on governance standards and funding discipline. By freezing benefit accruals, plan sponsors can stabilize their funded status and demonstrate prudent risk management, reducing the chance of enforcement actions or participant litigation. In short, a freeze is often as much about protecting the sponsor from liability as it is about controlling costs.

Hard Freeze vs. Soft Freeze: What Plan Sponsors Need to Know

When you decide to pause future pension credits, choosing between a hard freeze and a soft freeze shapes both your plan’s liabilities and your employees’ experience. While both approaches stop—or limit—new benefit accruals, they differ in scope, operational requirements, and long-term cost impact. Below, we break down each option and offer guidance on how to pick the right path for your organization.

Hard Freeze Explained

A hard freeze brings all future benefit accruals to an immediate halt for every participant—current and future. Key characteristics include:

Full suspension of credits: No one earns additional pension service after the effective date.
Vesting remains intact: Participants continue to vest under the original schedule, even if they weren’t fully vested at freeze date.
Existing benefits preserved: All accrued benefits stay in the plan and grow only by any cost-of-living adjustments specified in the agreement.

Example scenario: Acme Manufacturing implements a hard freeze on January 1. Employees with five years of service retain their earned benefit and vesting credit, but no one—whether hired last week or ten years ago—earns any new pension service beyond that date.

A hard freeze often delivers the greatest immediate reduction in projected liabilities, since it caps all future obligations at their current levels. Sponsors should plan for required communications, ERISA Section 204(h) notices, and any necessary plan amendments to reflect the change.

Soft Freeze Explained

Under a soft freeze, new hirings are blocked from the DB plan, but existing participants continue accruing benefits—sometimes at a reduced rate, depending on plan design. Soft freezes typically play out in two ways:

Closed-to-new-hires model: Only employees on the payroll at freeze date keep earning benefits under the original formula; new entrants are directed to a defined contribution plan.
Reduced-accrual model: All participants remain in the DB plan, but benefit multipliers or salary‐based credits are scaled back.

For example, Global Tech closes its DB plan to new employees on July 1, yet lets tenured staff accrue benefits at 1.2% of salary per year instead of the original 1.5%. This maintains a level of retention incentive for veteran employees while limiting future liability growth.

Compared with a hard freeze, a soft freeze eases the impact on employee morale—particularly for long-standing workers—while still reining in costs over time. Sponsors will need to adjust actuarial assumptions, update plan documents, and apply any accrual formula changes uniformly.

Choosing Between Hard and Soft Freezes

Picking the right freeze type hinges on balancing cost objectives, workforce concerns, and compliance responsibilities. Consider these factors:

Cost Savings vs. Employee Retention: Hard freezes yield swift liability relief; soft freezes can preserve a recruitment and retention tool for existing staff.
Workforce Demographics: A largely veteran workforce may welcome continued accruals, making a soft freeze more palatable. Conversely, organizations with high turnover might realize most savings through a hard freeze.
Notification and Amendment Requirements: Both freezes require ERISA Section 204(h) notices if benefits are materially reduced, but soft freezes often trigger fewer plan-document revisions when accrual rates merely adjust.
Long-Term Liability Impact: Project your obligation curves under each scenario. A hard freeze locks liabilities at current levels, while a soft freeze allows tapering growth—potentially lowering ultimate costs, but with a slower actuarial payoff.
Administrative Complexity: Hard freezes simplify accrual tracking but may increase participant inquiries. Soft freezes demand careful monitoring of eligibility and accrual calculations for two distinct employee groups.

By weighing these considerations, plan sponsors can select a strategy that aligns with their financial goals, workforce culture, and fiduciary duties. Whether you opt for an all-out hard freeze or a more nuanced soft freeze, clear communication and thorough plan-document amendments will set the stage for a smooth transition.

ERISA Section 204(h) and Advance Notice Requirements

When a sponsor freezes or materially reduces future benefit accruals, ERISA Section 204(h) requires advance notice to participants and beneficiaries. This notice ensures employees understand changes that will affect their retirement benefits and gives them time to seek guidance or adjust plans accordingly.

Overview of ERISA Section 204(h) Notice

ERISA Section 204(h) kicks in whenever a plan amendment causes a “significant reduction” in the rate of future benefit accrual. Examples include moving from a 1.5% multiplier to 1.0%, or closing the plan to new hires under a soft freeze. The notice must describe the nature and effect of the change in understandable terms. For exact regulatory language, see 26 CFR § 54.4980F-1.

Timing and Delivery Methods

ERISA mandates that the Section 204(h) notice be furnished within a “reasonable time” before the amendment’s effective date—generally at least 45 days in advance. Sponsors should build in extra lead time to handle printing, mailing delays, or union negotiations. Acceptable delivery methods include:

First-class mail to each participant’s address on file
Hand delivery with signed receipt
Electronic distribution, provided participants have consented and systems ensure receipt

Certain small plans or business transactions (for example, spin-offs) may qualify for reduced notice periods or alternative distribution rules. Always verify whether your plan’s size or recent corporate activity triggers any exceptions under ERISA guidance.

Consequences of Non-Compliance

Failure to provide a timely, accurate Section 204(h) notice can lead to steep penalties. The IRS may impose an excise tax of $100 per affected participant for each day the failure continues. Beyond excise taxes, sponsors risk fiduciary breach claims, participant grievances, and regulatory scrutiny from the Department of Labor. To avoid these pitfalls, integrate notice planning into your freeze timeline and maintain proof of delivery for every communication.

IRS Compliance and Plan Documentation Updates

Freezing your defined benefit pension plan marks the start of a new compliance cycle. Even though future accruals halt, you still must keep plan documents current, file accurate returns, and meet all IRS requirements. Overlooking any of these steps can lead to penalties, participant confusion, or an IRS audit. Below is a breakdown of the key documentation updates and filings you’ll need to tackle.

Amending Plan Documents for Current Law

Once you freeze benefits—whether via a hard or soft freeze—you’ll need to amend your official plan document to reflect the new accrual rules. Key considerations include:

Amendment deadline: Generally, you must adopt the freeze amendment by the end of the plan year in which the freeze takes effect. If you extend your Form 5500 filing deadline, that extension date often becomes your amendment deadline.
Summary Plan Description (SPD) updates: Within 210 days after the end of the plan year that includes the freeze, you must furnish participants with an updated SPD or a separate summary of material modifications (SMM). This ensures employees understand their benefit status and any changes to vesting or eligibility.
Document retention: Keep copies of the original plan, the amendment, and any SMMs or SPDs in your records. The IRS may request these in the event of an audit.

Failing to adopt amendments on time or properly update the SPD can jeopardize your plan’s qualified status and expose you to excise taxes.

Form 5500 Reporting and Pension Feature Codes

Your annual Form 5500 return is where the IRS and DOL verify that your plan remains compliant. For frozen DB plans, accurate reporting is crucial:

Pension feature code 1I: On Schedule A (Basic Plan Information), use feature code 1I to indicate a defined benefit plan with no future benefit accruals.
Avoid miscoding: Applying code 1I to a plan that’s still accruing benefits—or omitting it on a frozen plan—can trigger IRS inquiries or require a corrected filing.
EFAST2 electronic filing: All Form 5500s must be submitted through the EFAST2 system. For calendar-year plans, the due date is July 31, with an automatic extension to October 15 if you file Form 5558 before July 31.
Penalty exposure: Late or incorrect Form 5500 filings may incur up to $250 per day in DOL penalties (capped at $150,000 per plan year) plus IRS excise taxes for plan qualification failures.

Be proactive: build in internal reviews before filing to catch feature‐code errors or missing schedules.

Other Compliance Tasks (Nondiscrimination, Testing)

Freezes don’t exempt you from the ongoing compliance tests and annual requirements that all qualified plans face:

Nondiscrimination testing: Even a frozen plan must continue passing Section 401(a)(4) tests and, if applicable, top-heavy testing under Section 416. If your freeze alters the ratio of benefits between rank-and-file employees and executives, consult your actuary to adjust testing assumptions.
Required Minimum Distributions (RMDs): Participants who have reached the RMD age (generally 73 for 2025) must continue receiving distributions, even though no new benefits are accruing. Confirm that your recordkeeper is calculating and distributing RMDs correctly.
Summary Annual Report (SAR): Within nine months after the plan year ends (or two months after filing a 5500 extension), you must furnish participants with a SAR summarizing the plan’s financial status.
Other filings and disclosures: Don’t overlook remaining requirements—for example, any ongoing COBRA notices, blackout notices if you change investment options, and periodic fee disclosures under ERISA Section 408(b)(2).

By treating your frozen DB plan with the same discipline as an active plan—document updates, precise filings, and routine testing—you’ll preserve its qualified status and protect both sponsor and participant interests.

Pension Benefit Guaranty Corporation (PBGC) Premium Obligations

As the federal insurer for single‐employer defined benefit plans, the Pension Benefit Guaranty Corporation (PBGC) charges two types of annual premiums to help cover the cost of plan guarantees: a flat‐rate premium for every participant and a variable‐rate premium based on underfunded vested benefits. Understanding both components—and their recent indexing changes—is essential for budgeting and long-term funding strategies.

Flat-Rate Premiums

The flat‐rate premium is a fixed dollar amount charged per plan participant, regardless of the plan’s funded status. For plan years beginning in 2025, the flat‐rate premium is:

$106 per participant

This represents a steep rise from the flat rate of $35 in 2012, reflecting PBGC’s efforts to strengthen its insurance fund. Over time, sponsors have seen gradual increases:

2012: $35
2015: $42
2018: $69
2021: $82
2024: $97
2025: $106

Because every participant counts toward this line item, plan sponsors should forecast their headcount carefully. Even modest growth in plan enrollment can lead to unexpectedly higher premium expenses.

Variable-Rate Premiums for Underfunded Plans

The variable‐rate premium (VRP) targets plans with a funding shortfall. For 2025, the VRP is set at:

$52 per $1,000 of unfunded vested benefits (UVBs)
Capped at $717 per participant

Key points about VRP:

It applies only when the plan’s assets fall short of its vested benefit liabilities.
A larger UVB directly translates into a higher VRP bill, up to the per‐participant cap.
Recent legislation indexed VRP rates and caps to wage growth, meaning both the $52 and $717 figures will continue rising in coming years.

This premium can be substantial for underfunded plans, often exceeding the flat‐rate component. Sponsors must track their funded ratio closely to anticipate VRP liability.

Managing PBGC Premium Expenses

While PBGC premiums are unavoidable for ongoing plans, sponsors can employ several tactics to limit their impact:

Targeted Contribution Strategies
Schedule supplemental contributions in years of strong cash flow to reduce UVBs before the plan year ends. Even modest top‐up payments can lower the VRP base.
Liability-Driven Investment (LDI) Approaches
Shift a portion of plan assets into bonds or derivatives that closely match liability duration. Reducing interest-rate mismatch helps stabilize funded status and curbs large swings in UVBs.
Headcount Management
Review participant eligibility and remove retirees or deferred‐vested participants no longer affected by benefit accruals or distribution windows. Each removed participant lowers the flat‐rate premium burden.
De-Risking Transactions
Explore bulk annuity buy-ins or buy-outs to transfer a block of liabilities off the plan’s balance sheet. While this may incur a one-time cost, it can reduce both flat and variable PBGC premiums over time.

By integrating these practices into annual budgeting and investment policies, plan sponsors can smooth PBGC premium obligations and free up resources for other pension funding needs.

Ongoing Administration and HR Responsibilities

A plan freeze may halt future benefit accruals, but it does not end the administrative work. Sponsors and HR teams must continue managing every aspect of the plan to maintain compliance, support participants, and safeguard the plan’s qualified status. Effective administration hinges on accurate recordkeeping, timely filings, and proactive communication—elements that require ongoing attention long after the freeze date.

Maintaining a clear audit trail is critical. Errors in participant data or missed filing deadlines can expose your organization to penalties, participant disputes, and regulatory scrutiny. By establishing routine processes for data updates, government submissions, and employee outreach, HR and benefits administrators can ensure the frozen plan operates as smoothly as an active one.

Maintaining Plan Records and Participant Data

Accurate participant data lies at the heart of a well-run frozen plan. Regularly update your census with information on:

• Employee demographics (name, birth date, hire date)
• Service and vesting status
• Mailing and email addresses
• Employment status changes (separation, retirement)

Conduct periodic data audits—at least annually—to catch discrepancies before they affect benefit calculations or communications. Coordinate with payroll, payroll vendors, and third-party administrators to reconcile service records and contribution histories. Ensuring complete and correct data helps prevent miscalculations of pension entitlements and smooths the path for any future plan changes or termination.

Filing Government Forms and Statutory Requirements

Even though benefit accruals have ceased, your frozen plan still triggers routine filings and disclosures:

• Form 5500 (EFAST2): File by July 31 (or October 15 with an extension using Form 5558). Indicate feature code 1I for frozen DB plans.
• Summary Annual Report (SAR): Distribute to participants within nine months after the plan year ends—or two months after a Form 5500 extension.
• Summary Plan Description (SPD) or Summary of Material Modifications (SMM): Issue an updated SPD or SMM within 210 days after the plan year that includes your freeze amendment.
• Required Minimum Distributions (RMDs): Calculate and distribute for participants age 73+ per IRS rules, even though no new benefits accrue.

Keep all filings, SPDs, and amendment records for at least six years, and maintain copies of delivery proofs (certified mail receipts or electronic logs). Building a calendar of deadlines with automated reminders can help HR teams stay ahead of these requirements.

Participant Communications and Support

Transparent, timely communication eases anxiety and reduces call volumes. Develop a communications roadmap that includes:

• Initial Freeze Announcement: Explain the change, reasons behind it, and its impact on future accruals.
• FAQs and Fact Sheets: Address common questions—such as “Can you withdraw from a frozen pension?”—and outline distribution options:
– 25% tax-free lump sum
– Scheduled drawdown payments
– Purchase of an annuity
– Entire account cash-out (subject to tax and penalty rules)
• Town Halls or Webinars: Invite questions and provide one-on-one sessions with plan experts or fiduciaries.
• Ongoing Updates: Remind participants of key dates (e.g., RMD deadlines) and any investment or premium changes.

Consider establishing a dedicated support line or email address for pension inquiries, and track participant feedback to refine your messaging. By keeping employees informed and guiding them through their options, you demonstrate fiduciary care and help preserve trust—both essential when managing a frozen defined benefit plan.

Financial and Risk Management Strategies for Frozen Plans

Freezing a defined benefit plan marks a shift from growing liabilities to managing an existing benefit pool. Rather than chasing higher returns, sponsors of frozen plans aim to preserve assets, reduce volatility, and ensure the ability to meet promised benefits. Below are three core areas—funding policy, investment strategy, and risk‐transfer options—that can help you keep a frozen plan on solid financial footing.

Funding Policy Considerations

A frozen plan still requires regular contributions to meet minimum funding standards and control PBGC premium costs. Consider these funding best practices:

• Establish Predictable Contribution Schedules
– Work with your actuary to set contribution targets based on annual valuations.
– Lock in contribution ranges (for example, 80–100% of the projected service cost plus interest).
– Automate quarterly or semiannual payments to smooth cash‐flow demands.

• Monitor Funded Status Continuously
– Track the plan’s funded ratio—assets ÷ accrued liabilities—to spot swings.
– Use monthly or quarterly updates rather than waiting for year‐end reports.
– Tie funding decisions to your budget cycle and investment performance.

• Leverage Actuarial Assumptions Strategically
– Revisit discount rate assumptions each year; conservative rates may boost transparency.
– Align mortality and turnover assumptions with actual plan experience.
– Consider “corridor funding” approaches that allow minor shortfalls without triggering large immediate contributions.

By adopting a disciplined funding policy, you’ll keep unfunded vested benefits under control—a critical factor for minimizing variable‐rate PBGC premiums.

Investment Policy for Frozen Plans

With no new accruals, frozen plan assets should move from growth‐oriented portfolios toward liability‐matching strategies. Key shifts include:

• Liability‐Driven Investing (LDI)
– Match asset durations to projected benefit cash flows using long‐duration bonds or derivatives.
– Reduce interest‐rate risk: when market rates fall, bond values rise to offset higher liability valuations.

• Credit and Duration Management
– Gradually increase allocations to high‐quality corporate bonds and Treasuries.
– Limit equity exposure to a small risk budget—often 10% or less—to preserve capital.

• Regular Stress Testing
– Model how funded status reacts to a 100 bps shock in interest rates or a 10% equity drawdown.
– Adjust duration hedges or credit positions if tests reveal excessive surplus volatility.

An investment policy centered on protecting the funded ratio can help stabilize cash contributions and shield PBGC premium spikes tied to underfunding.

Risk Transfer and De‐Risking Techniques

For many sponsors, transferring some or all liabilities to an insurer is the ultimate way to cap future costs and eliminate volatility. Consider these risk‐transfer options:

• Bulk Annuity Buy‐Ins and Buy‐Outs
– Buy‐In: The plan purchases an insurance contract to hedge a block of liabilities while assets remain on the plan’s balance sheet.
– Buy‐Out: The insurer takes on both assets and liabilities, removing them entirely.
– Timing tip: Initiate buy‐ins when your funded ratio exceeds 100% to lock in favorable pricing.

• Lump‐Sum Window Offerings
– Offer a one‐time opportunity for deferred vested participants to take a lump‐sum payout.
– Pre‐annuity lump‐sum rates are often 10–40% below buy‐out prices, yielding cost savings.

• Hybrid Approaches
– Combine annuity purchases for the oldest cohorts and lump‐sum windows for younger participants.
– This strategy can reduce administrative burden and cap PBGC premium exposure incrementally.

Before executing a de‐risking move, model full‐cost scenarios—including transaction expenses, PBGC premium relief, and accounting impacts. Done right, risk‐transfer can be the final piece of a prudent frozen plan playbook.

By aligning your funding, investment, and risk‐transfer strategies, you’ll navigate the financial complexities of a frozen defined benefit pension plan with confidence—and ensure your organization remains well‐positioned to honor promised benefits.

Alternatives to Frozen DB Plans and Unfreezing Opportunities

Freezing a defined benefit pension plan can ease near-term liabilities, but it doesn’t have to be the final chapter in your retirement strategy. Plan sponsors can explore a spectrum of alternatives—from bolstering defined contribution offerings to reviving benefit accruals or migrating to hybrid designs. Each path carries its own mix of cost, complexity, and participant appeal. Below, we outline three viable approaches to keep your retirement program competitive and responsive to both business goals and employee expectations.

Offering Defined Contribution Plan Alternatives

Many sponsors pair a DB freeze with enhancements to their existing defined contribution (DC) plan. According to the Bureau of Labor Statistics, 37% of union and 44% of nonunion workers in frozen DB plans had an enhanced DC alternative as of March 2023. To make your DC plan stand out:

Increase employer matching: A higher match—say, 100% on the first 4% of salary—boosts participation and offsets lost DB accruals.
Introduce auto-enrollment and auto-escalation: Automatically enrolling new hires at a default savings rate (for example, 6%) and raising contributions annually by 1% helps build bigger balances over time.
Improve fee transparency: Offer low-cost index funds and provide clear, per-participant fee disclosures to meet ERISA Section 408(b)(2) requirements.
Expand education and advice: Webinars, online calculators, and one-on-one sessions with fiduciaries or financial coaches guide participants through investment choices and retirement projections.

By positioning your DC plan as a robust, user-friendly alternative, you maintain a valuable retirement benefit and give employees practical tools to manage their nest eggs.

Unfreezing a DB Plan: When and How?

In some cases, a sponsor may decide that reigniting benefit accruals makes sense—whether due to a stronger funded status, shifting talent needs, or legislative relief on funding assumptions. Milliman’s “Big Thaw” guidance suggests that organizations with excess assets can gain a competitive edge by reopening their DB plans to new hires or restoring accrual rates. To unfreeze responsibly:

Assess your funded position: Confirm you can absorb incremental liabilities without jeopardizing funding targets or spiking PBGC premiums.
Amend the plan document: Draft and adopt an amendment that reinstates your chosen accrual formula, and update the Summary Plan Description (SPD) or issue a Summary of Material Modifications (SMM).
Issue ERISA Section 204(h) notices: Alert participants at least 45 days before the effective date if benefit accruals will materially increase.
Update Form 5500 reporting: Remove or revise pension feature code 1I to reflect resumed accruals, and file any corrected returns via EFAST2.
Communicate clearly: Roll out town halls, FAQs, and one-on-one counseling to explain the thaw, eligibility criteria, and the impact on retirement projections.

These steps ensure that unfreezing is more than a symbolic gesture—it’s a structured, compliant revival of defined benefit promises.

Evaluating Hybrid and Cash Balance Plans

As an alternative to both pure DB and DC paths, consider a hybrid model—most commonly a cash balance plan—that blends guaranteed benefit features with account-style clarity. Key attributes include:

Benefit formula: Participants earn an annual “pay credit” (e.g., 4% of salary) and an “interest credit” (a fixed or variable rate), accumulating in hypothetical individual accounts.
Cost predictability: Cash balance designs convert a lifetime annuity promise into a lump-sum equivalent, making liability projections more transparent and often less volatile than traditional DB formulas.
Portability and communication: Account statements mirror DC plan statements, which participants find easier to understand. When they leave the company, the hypothetical balance can be rolled over into an IRA or 401(k).
Compliance considerations: Sponsors must update plan documents, SPD, and Form 5500 (using feature code 1E for cash balance plans) and ensure nondiscrimination testing covers the new design.

While a cash balance plan typically involves upfront design and communication work, it can offer the sponsor a middle ground—managing long-term risks like a DB plan while providing employees a familiar, account-based view of their benefits.

By exploring these alternatives—enhanced DC plans, unfreezing opportunities, or hybrid structures—plan sponsors can tailor their retirement offerings to align with evolving business priorities and workforce expectations. Whether you’re aiming to shore up funding, attract top talent, or simplify benefits communication, these strategies offer a path forward beyond a static freeze.

Planning for Plan Termination or Conversion

When a frozen defined benefit plan has served its purpose and your organization is ready to move on, planning a smooth termination or conversion becomes paramount. This phase transforms a paused pension arrangement into a final settlement, requires close coordination among legal, actuarial, and administrative teams, and demands strict adherence to ERISA and PBGC rules. The following roadmap breaks down the critical steps, from initial cleanup through wind-up, to help sponsors navigate this complex process with confidence.

Steps Leading to Plan Termination

Before you file any termination paperwork, you’ll need to:

Freeze benefit accruals
Confirm that your hard or soft freeze is fully implemented and documented. No new service credits should accrue once you initiate termination planning.
Clean and audit participant data
Verify birth dates, service records, and mailing addresses. Any data gaps can halt the termination or increase costs.
Engage an actuary for certification
Obtain a final actuarial valuation that calculates the lump-sum and annuity liabilities based on current interest rates and mortality tables.
Address PBGC termination options
Decide between a standard termination (with participant distributions) or a distress termination (if you qualify under Section 4042(c)). Each path has distinct funding deadlines and PBGC notice requirements.
Secure board or executive approval
Document the fiduciary decision to terminate, obtain sign-offs from your governing committee, and prepare resolutions authorizing contributions and transactions.
Update plan documents and amendments
Adopt any final amendments that codify freeze and termination dates. Amend the Summary Plan Description or issue a Summary of Material Modifications to alert participants to the upcoming wind-up.

Participant Notification and Benefit Settlement

Once foundational steps are complete, it’s time to communicate and distribute benefits:

Provide advance notices
Issue PBGC-required notices, plus ERISA Section 204(h) or 4041(e) communications, generally 60–90 days before termination, outlining distribution options and timelines.
Offer lump-sum elections
Present participants with lump-sum calculations that reflect current interest rates. Remember that tax rules allow a 25% tax-free portion for eligible distributions.
Facilitate annuity purchases
For those who prefer lifetime income, coordinate bulk annuity buy-outs or make individual annuity offers, comparing insurer quotes to your actuary’s liability figures.
Support IRA and 401(k) rollovers
Supply rollover forms and guidance so participants can move their lump sums into an individual retirement account without immediate tax consequences.
Handle special cases
Address spousal consents, qualified domestic relations orders (QDROs), and alternate payee requests in accordance with plan terms and federal requirements.

Post-Termination Plan Administration

Even after benefit payments are complete, a few loose ends remain:

File the termination schedule on Form 5500
Use Schedule H (large plans) or Schedule I (small plans) and check the “plan termination” box. Submit via EFAST2 by the regular filing deadline or extension date.
Distribute the final Summary Annual Report (SAR)
Provide participants with a clear accounting of assets, liabilities, and benefit settlements within nine months after plan year-end (or two months after an extension).
Retain and archive plan records
Keep all plan documents, notices, actuarial reports, and correspondence for at least six years. Maintain electronic or physical proof of delivery for participant communications.
Conduct an audit readiness review
Even terminated plans may be audited by the DOL or IRS. Ensure your files are complete and organized to respond quickly to any inquiries.
Close out vendor and fiduciary relationships
Terminate service agreements, transfer any residual assets to a designated fiduciary or PBGC-approved account, and secure final indemnity releases where applicable.

By following this structured roadmap—freezing accruals, certifying liabilities, notifying participants, settling benefits, and wrapping up filings—you’ll bring your defined benefit plan to a compliant and orderly close. Proper planning at each juncture minimizes risk, controls costs, and delivers clarity to participants as they transition to their next retirement vehicle.

Final Thoughts for Plan Sponsors

Freezing a defined benefit pension plan is more than a checkbox—it’s a strategic decision that requires careful planning, precise compliance, and a commitment to your participants. Start by choosing the right freeze approach—hard or soft—then document it thoroughly and issue your ERISA Section 204(h) notices on time. Establish a predictable funding policy, monitor your funded ratio regularly, and tilt investments toward liability-matching assets. Throughout, maintain transparent communications, from the initial announcement to distribution options and RMD reminders, so employees stay informed and confident in their retirement outlook.

A successful freeze strategy demands ongoing stewardship. Schedule annual plan reviews to revisit actuarial assumptions, audit your participant data, and adjust your investment and contribution policies as market conditions evolve. Lean on trusted advisors—actuaries, custodians, and fiduciaries—to help you navigate regulatory shifts, PBGC premium hikes, and evolving best practices. Their expertise can streamline administration, reduce liability, and ensure you’re always ready for the next compliance milestone.

Ready to put these insights into practice? Visit Retirement Capital for comprehensive retirement plan administration and fiduciary services that keep your plan compliant, your liabilities in check, and your participants supported—so you can focus on what matters most: running your business.