Note: This article was written in the context of larger corporate defined benefit pension plans. Small overfunded pension plans have unique characteristics that are not addressed here.

In the last several years in the pension consulting world, we have seen more employers in the U.S. corporate space with overfunded defined benefit (DB) pension plans, meaning the plan’s assets are greater than the plan’s actuarially calculated liabilities. As a sign of the times, Milliman estimated in our latest 2025 Corporate Pension Funding Study that approximately 35–40 of the 100 U.S. companies in this annual study had frozen pension plans with excess assets as of the end of 2024.

The overall funded status of pension plans has come a long way since the sharp decline following the Great Recession of 2008, thanks to strong asset returns over this period and, more recently, higher interest rates, which have lowered pension labilities. This has presented new opportunities for plan sponsors, many of whom are taking time in 2025 to consider the possible actions for their pension plans.

The options for DB plans with excess assets in the U.S. vary, depending on whether the plan is ongoing or if it is being terminated.

Options for using surplus assets in an ongoing pension plan

Corporate DB plan sponsors with overfunded pension plans have several strategies available to manage or use surplus assets in the plan, including:

1. Maintaining the frozen plan (“Hibernation”)
2. Unfreezing/reopening the plan
3. Plan termination
4. Funding retiree health benefits via a transfer under Internal Revenue Code Section 420
5. Workforce management through an early retirement incentive program
6. Increasing pension benefits
7. Paying certain administrative expenses from plan assets
8. Taking pension risk transfer steps without a full plan termination
9. Merging an overfunded plan with an underfunded plan

The first four options were summarized in this Milliman article: Frozen pension plan with a surplus? Four strategies for plans with excess assets. Some considerations follow.

• For plans in hibernation, it is prudent to periodically reassess the asset allocation to ensure the desired balance between stability and growth, and to stay proactive in managing the plan’s volatility and ongoing costs like Pension Benefit Guaranty Corporation (PBGC) insurance premiums.
• If the plan is amended to unfreeze benefits and reopen participation, it does not have to follow the original plan’s design. Plan sponsors may want to explore other options such as a market-based cash balance plan or a variable annuity pension plan, which could have advantages such as reducing risk to the plan sponsor and providing participants with additional benefit options or features.
• Plan sponsors who choose to terminate an overfunded DB pension plan should be aware of the rules around accessing surplus assets upon completion of the termination process, including the steep excise tax on employer reversions that typically applies in the U.S. (more on that following).

Using excess assets as a tool for workforce management (option 5) is another possibility for overfunded pension plans. Read how Milliman helped a client find such a solution in this case study.

Surplus assets could also be used to increase plan benefits (option 6). A plan that is not frozen, or will be unfrozen, could be amended to increase the amount of benefits or options available to participants. For example, this could be done by changing the benefit formula, providing more generous early retirement subsidies, or providing additional forms of payment like a lump-sum option. Note that surplus assets can also be used to increase benefits in a plan termination scenario for participants with accrued benefits as of the date of plan termination.

Certain pension plan expenses are allowed to be paid from the assets of the plan (option 7). These are sometimes referred to as “trust-payable expenses,” and could include fees related to such things as benefit calculations, preparation of required items like the annual Form 5500, PBGC premiums, and certain plan audit work. Some plan sponsors have historically chosen to pay all plan administrative expenses out of the company’s funds rather than from the plan assets. In the case of an overfunded plan, it might make sense to start paying these fees from the plan as a simple way to use up some of the excess funds. Legal counsel should be consulted on which specific plan-related expenses are eligible to be paid from plan assets.

Of course, it is reasonable for a plan sponsor of an overfunded frozen plan to contemplate terminating the plan. However, even if the plan is currently well funded and termination is the ultimate goal, the company may not be ready to initiate a termination process, which can take one to two years to complete for various reasons. In this situation, a plan sponsor could explore de-risking activities on a smaller level (option 8). These activities include a lump-sum window to cash out some of the plan’s population, in-service distributions, or a retiree lift-out, where the benefit obligation for a subset of the current retiree population is transferred to an insurer in a partial annuity placement. These de-risking activities shrink the size of the plan and reduce the magnitude of the plan’s volatility in preparation for a future plan termination. In addition, PBGC premiums are lowered by reducing the plan’s headcount. Note that these de-risking activities incur additional one-time fees, and there are other costs to consider, such as lost earnings on the assets that are transferred out of the plan, as well as the impact on the annuity purchase when the plan is ultimately terminated. Nonetheless, a well-timed pension risk transfer transaction can be worth it. More information on partial de-risking events can be found in these Milliman articles: Are lump sum windows right for your plan? and Retiree annuity purchases—finding value.

Some plan sponsors have more than one DB pension plan, for example, one plan might have been established for the company’s salaried population and another for its hourly population. If one plan is overfunded and the other is underfunded, it may be worthwhile merging the two plans (option 9) to improve the status of the underfunded plan. When contemplating a plan merger:

• Legal counsel should be involved from the start to ensure the merger complies with ERISA and other federal regulations, evaluate any collective bargaining issues, and prepare the necessary plan amendments and forms that must be filed.
• Consult with the plan’s actuary to assess and understand any projected funding considerations.
• Early in the process, notify service providers such as the plan’s trustee, third-party administrator, and investment managers so they can provide input and prepare for the transition.
• Consider how the change will be communicated to participants.

Options for using surplus assets in a terminating pension plan

If a plan termination has been initiated, the options for using surplus assets include:

1. Paying plan expenses
2. Employer reversion (either full or partial), if allowed in the plan document
3. Increasing participant benefits
4. Transferring assets to a qualified replacement plan

Expenses will increase during a plan termination because it is a process that usually includes a significant amount of involvement from various service providers, including outside administrators, actuaries, legal counsel, and investment managers. These expenses should be taken into account when estimating a plan’s asset surplus.

As noted, a key issue in the case of an overfunded plan terminating is that the excise tax on an employer reversion in the U.S. is sizeable (50% on a full reversion), in addition to applicable federal and state taxes. This excise tax can be reduced to 20% if the employer only takes a partial reversion and uses some of the excess assets to either increase participant benefits in the terminating plan or make a transfer of assets to a qualified replacement plan. Certain requirements must be met to accomplish this reduction in tax. If all the excess assets are used to either increase participant benefits or as a transfer to a qualified replacement plan, there is no employer reversion and thus the excise tax would not apply. More details regarding the rules for using the surplus in a terminating plan can be found in this article: Options for excess assets in a pension plan termination.

Sponsors of ongoing plans who are considering future plan termination should review the plan document to understand the current options for handling excess assets and assess whether any plan amendments would be beneficial now to prepare for a plan termination.

Which option to choose?

Which path is best for overfunded pension plans? There is certainly no one right answer, but plan sponsors can start by asking questions such as the following:

• Does the company have the capacity to take on a big plan change like plan termination or plan reopening/redesign?
• Is plan hibernation attractive for the foreseeable future due to an effective risk management strategy, no current required contributions to the plan, pension income on the accounting side, etc?
• What are the company’s general goals? These could range from enhancing participant benefits, maximizing cash back to the employer, or keeping the status quo so the company can focus on other initiatives.

Additional considerations

Pension plan sponsors should consult with their expert advisors, including the plan’s legal counsel, actuary, investment manager, and tax professional, prior to making any changes to their pension plan. Besides accomplishing the goal of being in compliance with applicable rules and regulations, consulting with professional advisors can help plan sponsors get a big-picture view of the pros and cons of making any changes to their pension plan.

Note that any type of amendment to the pension plan needs to pass certain requirements, including not violating anti-cutback rules and being nondiscriminatory (i.e., the plan cannot provide benefits that discriminate in favor of highly compensated employees).

In any situation that involves a change affecting participants, communication can make all the difference. Whether offering a lump-sum window, amending a plan to include a benefit increase or plan redesign, or initiating a plan termination, dedicating additional effort to the communication strategy can help make the process go more smoothly and enables participants to make informed choices.

No matter what decisions are ultimately made, now is a fitting time for plan sponsors with overfunded pension plans to review their situation. They could have more options than they realize.