Frozen Defined Benefit Plan: Swing for the Fences or De-Risk?

Size the problem honestly. The gap is $39M on a PBO basis, roughly 18% of liabilities. At $18–24M of annual contributions, five years of contributions plus modest returns can close it; five years of return alone at 6.5% versus 5.35% interest accrual produces a spread of only a few million. The gap is a funding problem with an investment component, not an investment problem.

Why more equity is risky, not just volatile:

• Funding volatility: at roughly 45% equity, plan asset volatility is on the order of 9–10%, or about $17–18M on $182M - almost exactly one year's contribution. A single bad year adds a year of contributions; a good year does not remove one, because contributions are smoothed.
• 436 restrictions: at an AFTAP of 78%, the plan is under 80%, which restricts lump sums and amendments increasing liabilities; under 60% it would freeze accruals (already frozen). A sharp loss can therefore lock out the lump sum window the CFO wants as a termination tool.
• At-risk funding: below 80% funding target attainment, at-risk assumptions apply, increasing the liability and the contribution - the glide path can move against the sponsor.
• PBGC premiums: the variable-rate premium is charged per $1,000 of unfunded vested benefits, so every dollar of loss costs contribution plus premium plus, potentially, the 10% excise tax under section 4971 for missed required contributions.
• IPS conflict: a 7% target with a 55% ceiling is an internally inconsistent policy; the committee is being asked to fix the target without fixing the risk budget.

Conclusion: the proposal treats a cash-flow and liability-management problem as a return problem. It increases the probability of a bad outcome in exactly the year the CFO needs optionality.

Structure the glide path on the funded ratio, not the calendar. Use a funding-basis or PBO measure and set triggers with committee pre-approval so action does not require a special meeting.

• Now (78–85% funded): retain a return-seeking allocation, but shift the equity sleeve toward lower-volatility and hedged exposures and add completion management so the long-bond portfolio actually matches liability duration. The current 40% long bonds are unlikely to hedge the full liability - quantify the hedge ratio before adding equity risk.
• Trigger at 85%: reduce equity by 10 points and extend liability hedging; begin settling small deferred vested liabilities via lump sums where permitted.
• Trigger at 90%: move to a majority fixed income portfolio targeting the termination liability; open a lump sum window if 436 permits (requires AFTAP above 80% and, in practice, careful pricing under 417(e)).
• Trigger at 95–100%: full LDI; lock in the termination liability and prepare an annuity purchase for the remaining participants.

Termination-readiness workstreams running in parallel:

• Data cleanup and missing-participant search (a termination cannot close with unresolved participants).
• Benefit calculations validated for all deferred vesteds and retirees.
• Plan document amendments and any remaining 204(h) notices completed.
• Annuity purchase market scan versus lump sum window economics for small balances.

Contribution policy: state explicitly that contributions are the primary funding lever, so the investment policy is sized against the contribution budget rather than against a hoped-for return.

Three levers, different economics:

1. Lump sum window (sponsor-initiated). Reduces headcount and administrative cost and transfers longevity and investment risk to participants who choose it. Costs: it must be priced on 417(e) actuarial assumptions, requires robust election materials, and take-up is unpredictable - a window that attracts only the healthiest participants can worsen the remaining liability's mortality profile. It also requires that benefit restrictions not apply (AFTAP at or above 80%).
2. Annuity purchase (buy-out). Transfers both investment and longevity risk to an insurer. Priced on insurer assumptions, often at a premium to book liability; requires an insurer selection process, evaluation of insurer financial strength, and a plan for participants whose benefits are not yet in pay status. At 95%+ funded this becomes the cleanest exit.
3. Standard termination. Only permitted if plan assets are sufficient to cover plan termination liability; otherwise the sponsor must make up the shortfall. A distress termination requires proving inability to pay and to continue in business - not available to a solvent sponsor and not a planning option.

Recommended sequence: contributions plus LDI to reach the termination liability; a lump sum window to shrink the population; an annuity purchase for the residual.

Fiduciary process: revise the IPS now with documented rationale, obtain an independent analysis of the glide path and of the annuity purchase (including fees and insurer strength), record the alternatives considered and rejected, confirm the committee is acting as a fiduciary for the settlement decision, and avoid using plan assets to study a transaction whose primary purpose is corporate financial reporting. Keep the CFO's balance-sheet objective in the business case but out of the fiduciary record.