Nuclear fission1 and pension plan termination. You’d be surprised at how much they have in common. In other words, left alone, fissionable material decays on its own, eventually distributing its last. On the other hand, with a little help, it can go away in one very big bang. It’s the same result in the end. Pension plans behave the same way. Left alone, they pay out monthly benefits along with lump sums, eventually distributing their final payments. The big bang version for a pension plan is a total termination. In either case, the result in the end is the same.
For a pension plan, these are the two extremes. Between these extremes is a continuum along the termination spectrum, which is controlled by the plan sponsor. We can accelerate the plan’s normal, slow rate of decay up to and including a big bang, total termination. This slower decay we ought to refer to as a termination, too, just not the big one, total termination. Today, such fractional terminations are popularly referred to as de-risking. Nothing new, mind you, just an updated moniker. Of course, with enough fractional terminations, we end up with a total termination just the same.
One type of fractional termination is a lump-sum window or cash-out initiative. Lump-sum windows usually refer to a plan which is offering lump-sum distributions to a vested group of former employees who otherwise would not have access to their benefits until retirement. The window of opportunity usually exists for a few months, then closes. Cash-out initiatives are slightly different in that the former employees already have access to a lump sum distribution but now are getting a friendly reminder. After declining the original offer, their lump sum may have grown and is perhaps now a bit more desirable. Both types of project can be regulated toward a manageable administrative size or with an eye toward avoiding unwanted accounting repercussions. Target groups are made up of those former employees who retain a vested benefit under the plan. Retirees in pay status are off limits. These groups may require administrative sleuthing if mailing address information is out of date.
Another type of fractional termination is off-loading plan obligations to an insurance company through the purchase of an annuity. This is the principal means of removing retirees from the plan. Carriers may want the business enough to drive the purchase price of the annuity down sufficiently to make the opportunity very attractive to a sponsor. These annuity placements may also be sized to fit the sponsor’s financial needs.
This leaves us with those plan participants who are still employed by the sponsor, which brings us back to the big bang total termination. We need to be a little clearer about this. A total termination is a big bang because you can distribute lump sums and place annuities for everyone left in the plan all at once. It also requires a high level of rigor as it falls under focused scrutiny by the U.S. Department of Labor, the Internal Revenue Service (IRS), and the Pension Benefit Guaranty Corporation (PBGC). A big bang total termination is just a whole bunch of fractional terminations bundled up to occur all at once under a formal regulatory framework.
Nuclear fission can happen bit by bit over time or can be speeded up with sudden and dramatic results. Working a series of fractional terminations, perhaps leading up to a total termination, allows greater flexibility of timing and financial control for a plan sponsor.
1If your physics is a little rusty, nuclear fission is “the splitting of an atomic nucleus into approximately equal parts, either spontaneously or as a result of the impact of a particle usually with an associated release of energy. Collins English Dictionary, 12th ed. (2014). “Nuclear fission.” Retrieved January 18, 2016, from http://www.thefreedictionary.com/nuclear+fission.