1. Rally support

Terminating a defined benefit plan will save the company money in the long run. But plan termination projects are a lot of work and typically require significant one-time cash outlay, which makes them difficult to get off the ground without strong internal support.

Therefore, identifying an executive sponsor and making team leads accountable for the project's success is an important first step, whether your termination date is imminent or in the distant future.

Many companies lack the internal resources to execute a successful plan termination. In such cases, an actuary or third-party consultant can offer both the experience and additional resources required.

2. Choose a termination date

A typical plan termination project runs 12 to 18 months. The date of plan termination is usually set at month five or six and becomes the anchor date around which all other deadlines are based.

Certain notices must be sent ahead of the date of plan termination, while other notices and government filings must be filed after. The transfer of assets to an insurance company occurs near the end of the project timeframe.

Pick a date of plan termination that aligns with the plan's asset management strategy and that allows sufficient time to prepare for required deadlines.

3. Hone your investment strategy

Generally speaking, the closer a plan gets to termination, the more conservative the plan sponsors should be with its assets. But getting the timing right can be difficult.

Employers who jump the gun on divesting equity stocks in favor of fixed-income securities may not earn enough to fully fund the plan without a major influx of capital from the business.

But those who wait too long to pull out of equities may suffer the consequences of market exposure. A qualified professional asset manager working in conjunction with your actuary can help plan sponsors make shrewd decisions about when and how to adjust its investments.

4. Perform additional de-risking actions

Plan sponsors may wish to undertake "de-risking" activities to reduce the volatility of plan liabilities in advance of termination. For instance, lump-sum payout windows are often used to remove terminated vested employees from the plan. These participants may be 10 to 40 years away from retirement and will then spend another 10 to 30 years in retirement.

It's difficult to predict how markets will perform over such an extended time horizon — or even how long participants will survive. Consequently, removing them will make the plan's liabilities smaller and more predictable.

There are other ways to shrink a plan, such as purchasing group annuities to buy out retiree populations. In all cases, plan sponsors should bear in mind that there are drawbacks as well as benefits to shrinking a plan.

Removing participants will reduce the plan's liabilities, but it will also reduce the plan's assets, which in turn limits how much investment income the plan can earn.

Moreover, shrinking a plan too much can make it unattractive to insurance companies, making it harder to negotiate a favorable contract at the time of termination.

5. Locate lost participants and confirm beneficiary status

Data cleanup is a major part of a plan termination. You will need final calculated benefits for everyone, even those difficult cases you've been able to put off for years. Some plan sponsors have participants whose data issues are not researched until they apply for retirement.

All of these must be resolved before the termination. Uncashed checks, lost participants, alternate payees under a QDRO, suspended in-pay retirees and pre-retirement deaths should all be addressed in advance of a plan termination to ensure the most financially efficient outcome for each population.

6. Diligently fund the plan

The plan actuary should help the plan sponsor formulate a strategy for fully funding the plan for termination. For instance, let's say a pension plan sponsor has accumulated a $30 million shortfall that must be made whole before the plan can be terminated. Normally, the plan sponsor might amortize the shortfall over the next seven years using the IRS minimum funding calculation.

But to prepare for plan termination, it might behoove the plan sponsor to fund the plan above the minimum — recalibrating each year as interest rates adjust and asset balances change — to close the shortfall gap.

Decisions, decisions

Each phase of plan termination involves numerous decision points and incredible amounts of data-crunching. Will the company offer a one-time lump-sum payout window? If so, what will the provisions be? Will it include the early retirement subsidy in the lump-sum value? Is the company going to submit for a determination letter? If so, will it wait for the IRS' response before it pays out lump sums? And so on and so forth.

Preparation is key to avoiding missed deadlines that can result in both plan compliance issues and extra expenses due to market exposure. Each phase of a plan termination requires careful orchestration of numerous, interdependent decisions, each of which comes with its own timing and data requirements.

Many plan sponsors benefit from the guidance of an advocate or consultant who can keep projects on track by staying ahead of decisions and data issues and bringing recommendations to the attention of the retirement committee at the appropriate time.

Mindy Zatto co-founded Strategic Benefits Advisors in 2002. She has over 25 years of industry experience and is widely recognized as a leader in the employee benefits field. Mindy has assisted numerous Fortune 500 companies in plan design and implementation, benchmarking and merger/acquisition due diligence as well as protected benefit analysis, plan terminations, cost studies, union negotiations, early retirement enhancement programs and nondiscrimination testing and compliance solutions.Mindy's areas of expertise encompass defined benefit, defined contribution and health and welfare programs — both from a strategic plan design level as well as an administrative level. She was an industry pioneer in the defined benefit outsourcing arena and developed one of the first complete defined benefit administration practices in the country.