By Peter Austin, Executive Director and Andrew Wozniak, Director, Research & Analysis, BNY Mellon Asset Management

Many companies are choosing to freeze their defined benefit plans to eliminate volatility and financial risk. But unless done properly, freezing can actually increase risk, as explained in this report by BNY Mellon Asset Management experts.

Most companies freeze their plans because they cannot terminate them immediately, due to the large cash requirements needed to address the funding shortfall. In fact, termination worsens the shortfall for a plan that already is under-funded because a lower discount rate is used to value the liabilities. Thus, paying employees lump sums to terminate the plan or paying insurance companies to assume the obligations are expensive options.

The analysis makes some concrete recommendations for executives who are involved in freezing their plans. They should ask:

• Have we really eliminated plan risk and volatility?
• Is termination our end goal? If so, how and when do we terminate?
• How do we address our funding gap?
• Should we change our asset allocation?

For a hard copy of this report, please contact Peter Austin, Executive Director, BNY Mellon Asset Management, 412 234-4474.