Skip navigation.
Go to the Principal Financial Group(R) home page
Secure  Account Login

Select login type:

Trends & Insights
Quick Links

Frozen Defined Benefit Plan Market Heating Up

Plan Sponsors of frozen defined benefit plans need your help. By guiding them through the plan termination process, you can differentiate yourself in this burgeoning market.

Article originally posted on

About Tim Minard About the Author

By Tim Minard, senior vice president, the Principal Financial Group®

You've witnessed the dramatic shift in the defined benefit (DB) plan market. At one time, DB plans were the primary employer-sponsored retirement benefit. Today, frozen DB plans make up an estimated one-third to one-half of the overall DB market[1].

Sponsors of hard frozen DB plans continue to feel the financial strain of low interest rates and volatile markets. And many aren't sure how to take the next logical step--shutting the plans down altogether. This presents an excellent opportunity for financial professionals with the knowledge and resources to guide plan sponsors through the termination process.

How big is the opportunity? Total assets in the DB market were $2.6 trillion as of December 31, 2010. With frozen DB plans counting for one-third to one-half of the overall DB market, that equates to a frozen DB plan market of about $1 trillion[2] (yes, that's trillion).

What plan sponsors of frozen DB plans face

What are many sponsors of frozen DB plans going through right now? First, they likely lack a clear termination strategy. And service providers generally can't help them throughout the entire spectrum of the termination process.

Plan sponsors often aren't prepared to execute a termination once the plan is fully funded. Even if the market and interest rates rebound, there are a lot of moving parts to effectively execute a plan termination--from gathering and verifying accuracy of participant data, to proper disclosures, to the final distribution of assets.

They're also are generally worried about interest rates. Sponsors of frozen DB plans are anxious to get the plans off their books. But they continue to feel financial pain, often with no clear end in sight due to low interest rates and volatile equity markets. Based on our experience, a one percent change in interest rates, for example, can cause a 12 to 15 percent change in liabilities for the plan. That can result in big unwanted surprises to an organization's financials.

Key steps in the termination process

First and foremost, a successful plan termination requires a coordinated effort. It's critical that the plan sponsor, financial professional or consultant, actuary and other retirement plan service providers all work together within a shared plan.

Based on our experience and research, that plan should include:

  1. Developing a termination strategy by evaluating cost, funding strategies and the impact of asset allocation
  2. Effective execution of a Dynamic Asset Allocation strategy
  3. Efficient administration of the plan termination process
  4. Final risk transfer--distribution of assets to settle obligations

Not surprisingly, the process is complex and somewhat lengthy. It also involves compliance with a variety of government regulations. It's important to work with service providers who have extensive DB expertise. A white paper series from The Principal® is a resource that can help you and your clients through the process. Best Practices for Building a Termination Strategy (PDF: 782 KB) and Best Practices for Executing a Termination Strategy (PDF: 139 KB) take plan sponsors and their financial professional or consultant from development of a termination strategy all the way through the distribution of participant assets.

Prospecting for clients with frozen DB plans

This opportunity is unique in that it can be approached from the finance side through the chief financial officer (CFO) versus the human resources side. Developing a clear exit strategy is typically a high priority for CFOs. They're motivated because of the far-reaching impact of the frozen plan on the financials of the organization.

Another area of opportunity lies with smaller DB plan sponsors (between $10 million - $100 million in plan assets). These smaller plan sponsors may not always get as much attention and services as larger plans.

This lower service level can result in a disconnect between the assets and liabilities--an issue that's critical to an effective plan term strategy. This is an area of opportunity for you to help bring these key areas together via an investment strategy prepared in collaboration with an actuarial assessment of the liabilities.

Help clients achieve a smoother process

Terminating a DB plan can be time-consuming and complicated. Working with experienced service providers, you can differentiate yourself in this potentially lucrative marke--and provide a valuable service--helping plan sponsors smooth out the process.

Internal Revenue Service Form 5500 Series Filings and PBGC Premium Filings for single-employer plans for plan years 2003 - 2009; TowersWatson, US - Insider, Pension Freezes Among the Fortune 1000 in 2011, November 2011.
Private DB assets recovered to $2.3 trillion by year-end 2010 - Cerulli Quantitative Update, Retirement Markets 2011.


For more information about Principal Funds, please see the Principal Funds, Inc. prospectus or call Customer Service at 1.800.222.5852.

Investment options are subject to investment risk. Shares or unit values will fluctuate and investments, when redeemed, may be worth more or less than their original cost. This does not apply, however, to the guaranteed portions of group annuity contracts issued by Principal Life that constitute guaranteed benefit policies as defined in ERISA §401(b)(2)(B).

Insurance products issued by Principal National Life Insurance Co. (except in NY) and Principal Life Insurance Co. Plan administrative services offered through Principal Life. Securities offered through Princor Financial Services Corp. 800.247.1737, member SIPC and/or independent broker dealers. Principal Funds, Inc. is distributed by Principal Funds Distributor, Inc. Principal National, Principal Life, Princor® and Principal Funds Distributor are members of the Principal Financial Group®, Des Moines, IA 50392.

Investment advisory services offered by the affiliates and specialized investment groups of Principal Global Investors, the asset management arm of the Principal Financial Group.

Have a question? Call us at 1.800.986.3343

Copyright © , Principal Financial Services, Inc.
Disclosures and Terms of Use | Products and Services Disclosures | Privacy and Security
Securities offered through Princor Financial Services Corporation, member SIPC