Upfront: Is Your Pension Plan Frozen -- and Forgotten?

To avoid an unpleasant surprise, keep assets aligned with liabilities in your frozen defined-benefit plan.

By freezing its defined-benefit pension plan, a company can ensure that, at some point in the future, it will no longer need to contribute cash to the plan. But that doesn't mean it can take a holiday from decision-making. "As hundreds of corporations have frozen their defined-benefit pensions, and more are planning to do so, a misconception is rife that plan sponsors don't have to worry about their frozen plans any further," says Stewart Lawrence, senior vice president at The Segal Co., an HR consulting firm headquartered in New York City. "Once a plan is frozen, the time horizon over which it will pay out benefits continues to shrink," Lawrence explains. "This is perhaps clearest in the extreme -- when all participants have already retired and are of fairly advanced age. If this fact is ignored in the investment policy, the plan will find itself investing in equities at a time when most of the liabilities are coming due within the next few years -- clearly a risky undertaking for an individual or for a pension plan."

A surprisingly large number of organizations fail to detect that danger. "The growing misalignment of assets and liabilities only manifests itself over time, and the consequences of failing to intervene early will only emerge as time goes by," Lawrence notes.

Freezing a plan calls for a reevaluation of pension asset allocation and investment strategy, according to John DeMairo, chief operating officer for Segal Advisors, the investment consulting affiliate of The Segal Co. The review should focus on the plan's liquidity requirements and the plan sponsor's volatility tolerance, and it needs to establish an orderly process for moving from an equity-fixed income mixed asset allocation to a bond and cash-only portfolio.