A defined benefit (pension) plan sponsor who is considering transitioning to a defined contribution plan, such as a 401(k), 457 or  a 403(b), begins by analyzing the impact of the transition on the company’s finances and the plan participants.  If, after a thorough analysis of the pros and cons of making this type of change, you decide to proceed, there are several steps involved.

Defined Benefit Plan

If the defined benefit plan has sufficient assets to pay out all of the benefits due under the plan, the plan can be terminated and participants can have a chance to roll over their benefit to the defined contribution plan.  If not, the plan should be amended to cease future benefit accruals and close the plan to new entrants.  The defined benefit plan will continue to have funding obligations until the assets cover the plan termination liabilities.  At that point, the plan can be terminated.

Defined Contribution Plan

The analysis that preceded the decision to change plan design platforms will have included studying defined contribution design options.  After the desired options have been selected, a plan document must be created reflecting the design choices and service providers must be selected.

Participants must be enrolled in the new defined contribution plan, including selecting how much to defer from their salary and selecting their desired investment options if the plan contains these features.

If you have questions about making the transition from a defined benefit plan to a defined contribution plan, please contact a Nyhart retirement professional.

This article was last updated on November 8, 2011