Active vs. Frozen Defined Benefit Plans: What's the Difference?

When it comes to managing a Defined Benefit (DB) plan, understanding whether the plan is active or frozen is crucial for both employers and participants. These two statuses represent different stages in the lifecycle of a DB plan and have significant implications for both the plan's future and the retirement security of its participants [1].

Active DB Plans: Continuing the Promise

An active DB plan is one that continues to fulfill its original purpose: providing retirement benefits to employees based on a predetermined formula. This formula typically factors in an employee's years of service and salary, promising a specific payout upon retirement [2]. As long as a DB plan remains active, employees keep accruing benefits. Every additional year of service and every salary increase can enhance their future retirement payout. 

For employers, maintaining an active DB plan means ongoing financial obligations. They must continue funding the plan, often requiring regular actuarial assessments to ensure the plan remains adequately funded to meet its future liabilities [3]. The benefit of an active plan is clear—it can be a powerful tool for attracting and retaining talent, as it offers employees a predictable and secure retirement benefit.

"A defined benefit plan provides a fixed, pre-established benefit for employees at retirement." - Internal Revenue Service [2]

Frozen DB Plans: Stopping the Clock

A frozen DB plan, in contrast, has ceased accruing new benefits for participants. When a plan is frozen, participants keep the benefits they've already earned, but they won't accumulate any more, regardless of how long they stay with the company or how their salaries change [4]. There are different ways a plan can be frozen. A "soft freeze" might stop benefit accruals for new employees while allowing current employees to continue earning benefits. A "hard freeze" halts all benefit accruals for all employees [5].

For employers, freezing a DB plan can be a strategic decision, often driven by financial considerations. The rising costs of funding these plans, coupled with increased life expectancy and market volatility, can make DB plans a significant financial burden. By freezing the plan, employers can stabilize their future financial commitments, though they must still manage the plan's existing obligations, ensuring they have enough assets to pay out the benefits that were earned before the freeze.

"Freezing a pension plan marks the end of active benefit accruals for some or all plan participants." - Milliman

The Implications of Freezing a Plan

Freezing a DB plan doesn't eliminate an employer's fiduciary responsibilities. Even after a plan is frozen, the employer must continue to manage the plan's assets prudently and ensure that all participants receive the benefits they've earned. This can include ongoing contributions to address any funding shortfalls and regular communications with participants to keep them informed about the status of their benefits.

For employees, a frozen plan can be a wake-up call to reassess their retirement strategy. Since they won't be earning additional benefits under the DB plan, they might need to increase contributions to other retirement savings vehicles, such as a 401(k) or an IRA, to ensure they meet their retirement goals.

Conclusion

Understanding whether a DB plan is active or frozen is essential for both employers and employees. For employers, the decision to keep a plan active or freeze it is often a balancing act between financial sustainability and the promise of retirement security. For employees, the status of their DB plan can significantly impact their retirement planning and financial future.

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References

 [1] U.S. Department of Labor. (2023). Types of Retirement Plans. Retrieved from https://www.dol.gov/general/topic/retirement/typesofplans 

 [2] Internal Revenue Service. (2023). Defined Benefit Plan. Retrieved from https://www.irs.gov/retirement-plans/defined-benefit-plan 

 [3] Pension Benefit Guaranty Corporation. (2023). Plan Administration. Retrieved from https://www.pbgc.gov/prac/plan-administration 

 [4] U.S. Department of Labor. (2023). Frozen Defined Benefit Plans. Retrieved from https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/faqs/frozen-defined-benefit-plans 

 [5] Society for Human Resource Management. (2023). Freezing a Defined Benefit Pension Plan. Retrieved from https://www.shrm.org/resourcesandtools/tools-and-samples/hr-qa/pages/freezingadefinedbenefit.aspx