Hard vs. Soft Freeze in a Defined Benefit Plan: What's the Difference?

Defined Benefit (DB) plans have long been a staple of retirement planning, providing employees with predictable income in retirement based on factors like salary history and length of service. However, economic pressures and changing workforce dynamics have led many employers to rethink their commitment to these plans [1]. This often results in either a "hard freeze" or a "soft freeze." Understanding the difference between these two approaches is crucial for fiduciaries tasked with managing DB plans.

What is a Hard Freeze?

A hard freeze is the more drastic of the two options. When an employer implements a hard freeze, it effectively locks the DB plan in place. No new employees can join the plan, and current participants stop accruing any additional benefits [2]. Their pension is essentially frozen at its current level, based on the years of service and salary history up to the date of the freeze. While existing benefits are preserved, no further growth occurs, and the plan is maintained only to pay out the benefits that have already been earned [3].

A hard freeze can be seen as a way for companies to cap their future financial obligations related to the plan, providing them with greater predictability in their financial planning. However, it can also be a significant change for employees, particularly those who were relying on continued accruals to enhance their retirement security.

"In a hard freeze, all future benefit accruals are frozen and you won't earn any additional benefits after the effective date." [2]

What is a Soft Freeze?

A soft freeze, on the other hand, is less severe and more flexible. In this scenario, the plan is closed to new participants, meaning that only current employees who are already part of the plan can continue to accrue benefits [4]. However, even among existing participants, the accrual of benefits may be limited based on certain criteria, such as tenure or age. For example, newer employees might stop accruing benefits, while longer-tenured employees might continue to earn benefits as before [5].

A soft freeze allows companies to manage costs more effectively while still offering some level of benefit accrual to their existing workforce. This approach can be less disruptive than a hard freeze, as it maintains a degree of continuity for certain employees, particularly those nearing retirement who are most dependent on the benefits.

Why the Difference Matters

For fiduciaries, understanding the distinction between a hard freeze and a soft freeze is essential. Each option carries different implications for plan participants and the company's financial obligations. A hard freeze might offer immediate cost control benefits but could lead to dissatisfaction among employees who feel their retirement security has been compromised. Conversely, a soft freeze might strike a balance by controlling costs while still honoring commitments to long-serving employees [1].

When considering either approach, fiduciaries must carefully evaluate the plan's funding status, the demographic makeup of the workforce, and the long-term financial strategy of the company. Clear communication with plan participants is also crucial to ensure they understand how their benefits will be affected and to maintain trust in the company's retirement offerings [5].

"Freezing a DB pension plan is typically used to limit the long-term costs of the plan, thereby reducing plan liabilities. It is also the first step on the path to terminating the pension plan." [1]

In summary, a hard freeze is a full stop, halting all future benefit accruals and new enrollments, while a soft freeze allows some continued accrual for existing participants. Each option has different implications for both the company and its employees, and fiduciaries must weigh these carefully when managing a DB plan.

For support in managing your fiduciary responsibilities, visit Fiduciary In A Box.  

© 2024 Fiduciary In A Box, Inc. All rights reserved

References

 [1] Milliman. (2022, May 10). Frozen pension plans: The way forward - The decision starting point. Retrieved from https://www.milliman.com/en/insight/the-way-forward-decision-starting-point 

 [2] Experian. (2024, April 26). What Is a Frozen Pension Plan? Retrieved from https://www.experian.com/blogs/ask-experian/what-is-frozen-pension-plan/ 

 [3] Pension Action Center, Gerontology Institute, University of Massachusetts Boston. (2017, April). My Company is Freezing the Pension Plan: What does this mean? Retrieved from https://scholarworks.umb.edu/pensionaction_pubs/3/ 

 [4] Emparion. (2024, February 17). How to Freeze a Cash Balance Plan or Defined Benefit Plan. Retrieved from https://www.emparion.com/freeze-a-cash-balance-plan-or-defined-benefit-plan/ 

 [5] Pension Benefit Guaranty Corporation. (2005, December 21). An Analysis of Frozen Defined Benefit Plans. Retrieved from https://www.govinfo.gov/content/pkg/GOVPUB-Y3_P38_2-PURL-gpo9348/pdf/GOVPUB-Y3_P38_2-PURL-gpo9348.pdf