Pension Plan Termination and Annuity Purchase: Know Your Options

By Drew Gurley

When a plan sponsor makes the decision to terminate a pension plan, it sets off a highly regulated plan termination process that impacts retirees, active participants, and future beneficiaries.

Whether you’re an employer handling corporate liabilities or a retiree concerned about your accrued benefits, one of the most important aspects to understand is the role of the annuity purchase.

My name is Drew Gurley and I’ve helped people navigate pension plan terminations for nearly 16 years and never charge a fee using insurance products. Please reach out with any questions you have and I’ll be happy to help.

Why Pension Plans Terminate

There can be multiple reasons defined benefit plans (DB plans) wind down and terminate.

• Rising pension liabilities and the strain they put on the company balance sheet
• Volatility in plan funding due to fluctuating interest rates and market conditions
• Strategic shifts from a defined benefit pension plan to a defined contribution plan, such as a 401(k)
• Oversight from the IRS, DOL, and the Pension Benefit Guaranty Corporation (PBGC) creating compliance pressure

Regardless of the cause, ERISA requires that plan participants receive the full value of their participants’ benefits.

The Plan Termination Process

A terminated plan follows strict rules under ERISA and the PBGC. The process generally includes the following:

1. Filing a notice of intent with regulators and providing a notice of plan benefits to participants.
2. The plan administrator reviewing the plan document, ensuring all plan assets are accounted for.
3. An actuarial valuation to determine the present value of benefits and calculate the proper pricing for payouts.
4. Distributing lump sum payments, offering cash-out options, or transferring obligations through an annuity contract with an insurance company.

This process ensures that all retirees, active participants, and their beneficiaries are protected.

Lump Sum vs. Annuity Purchase

Participants often face a choice between taking a lump sum distribution or transferring benefits into a group annuity.

• Lump Sum: A one-time payout that can be rolled into an IRA, retirement account or an individually owned annuity. While it provides flexibility, it can also place investment and longevity risk on the individual which should be discussed with a financial advisor.
• Annuity Purchase: The plan sponsor transfers liabilities to an insurance company through a group annuity. This guarantees monthly benefits for life, closely mirroring the original pension promises.

Many employers prefer annuities because they remove pension risk and represent a permanent risk transfer from the plan’s investment strategy to external providers.

Key Considerations for Participants

If you’re a retiree or employee in a terminated plan, you’ll want to ask the following at a minimum:

• Which insurance company is issuing the annuity contract, and how stable are they?
• What annuity purchase options exist? Single life, joint life, period certain or a combination?
• Would a lump sum payment rolled into an IRA or retirement plan better fit your long-term strategy?

Each option affects your security, taxes, and ability to leave money to beneficiaries, so it’s very important to include your professional services team members or someone who can help you assemble the right players if you don’t have them in place already.

Key Considerations for Plan Sponsors

For employers, a standard termination requires careful planning:

• Ensuring plan assets are sufficient to cover participants’ benefits.
• Managing buy-in pricing when selecting insurance company providers.
• Accurately calculating actuarial assumptions around interest rates and present value.
• Preparing for the effect on the corporate balance sheet once liabilities are offloaded.

The termination date is critical, as it fixes the valuation point for benefits. Compliance with ERISA, the PBGC, the IRS, and the DOL is non-negotiable

Why Work With an Expert

The intersection of ERISA rules, actuarial valuations, and pension risk transfers is complicated.

Employers need guidance in selecting the right providers, and participants need advice on whether a lump sum or annuity makes more sense for their future.

That’s where I come in. My role is to simplify the complexity, explain your choices in plain language, make sure both plan sponsors and individuals make informed decisions, and assemble the professional team needed to get the right guidance.

Next Steps

A plan termination doesn’t have to feel like the end of stability.

With the right approach, whether through a lump sum distribution or a secure annuity purchase, your retirement benefits can continue to provide confidence and peace of mind.

Reach out to me today. I’ll walk you through the process, evaluate your options, and ensure your benefits are protected for the future.