A Hidden Risk When Terminating a Defined Benefit Pension Plan
For many employers, terminating a defined benefit (DB) pension plan is a long-awaited milestone. It means freedom from ongoing Pension Benefit Guaranty Corporation (PBGC) premiums, large vendor fees, and administrative distractions.
But the very moment you’re poised to exit can also be when your vendors take advantage. Many plan sponsors aren’t aware of the predatory fee practices some actuaries, recordkeepers and administrators employ during the termination process.
Why Fees Spike When Plans Terminate
When a DB plan terminates, every service provider tied to that plan loses ongoing revenue. That includes the plan’s lawyer, auditor, and especially the actuary and plan recordkeeper/administrator.
It’s natural for termination work to cost more — after all, the administrator has extra tasks. A reasonable benchmark: termination fees about three times your normal annual actuary and administration fees.
But in reality, many incumbent providers inflate fees to five to ten times the annual cost. They’re banking on you not shopping the market at this critical time.
Why vendors inflate termination fees
- They’re losing future administrative revenue and want to recoup it upfront.
- They expect clients won’t check the market or question the quote.
- They assume employers fear disruption if they switch vendors mid-stream. Not true.
- They rely on the fact that other, larger numbers at play will dull fee sensitivity. (“What’s a couple hundred thousand when a $100 million is at play?”)
A Real-World Case Study
One Cofi client with a $100 million DB plan received an $800,000 quote for termination services from its actuary/administrator— five times its normal $160,000 annual fee.
We ran a fiduciary RFP for the actuarial and plan termination services and found a highly qualified firm who did the same work for $180,000. The employer not only saved $620,000, but also upgraded the quality of service during the process.
Three Steps to Protect Your Company’s Bottom Line
- Get a firm fee quote early.
As soon as plan termination is on the horizon, ask your actuary/administrator for a firm fee quote covering all termination services. - Benchmark against the three-times rule.
If the quote exceeds roughly three times your annual fee, immediately run an RFP for the termination services. - Lock in future termination fees now.
If you’re three or more years from plan termination, perform a full RFP for administrative services today — and require each candidate to commit to a firm termination fee in the contract.
The Co-Fiduciary Advantage
Terminating a defined benefit plan is complex enough without overpaying. Acting proactively, benchmarking fees, and running a competitive process can save hundreds of thousands of dollars.
At Cofi, we’re fiduciaries — not brokers — focused on protecting employers from unnecessary costs and ensuring a smooth plan termination.