Plan sponsors that have a surplus and credit balance in a frozen defined benefit (DB) plan, and that also sponsor a defined contribution (DC) plan such as a 401(k), may have an opportunity to reduce ongoing DC costs, make better use of existing pension assets, and provide employees with a more secure retirement benefit.
Plan funding levels are improving, and now is a good time for sponsors to take another look at their frozen DB plans. According to the 2026 Milliman Corporate Pension Funding Study, the average funded ratio for fiscal year-end 2025 was just under 104%, with a funded status surplus at $48.1 billion, making it especially timely to consider whether reopening a DB plan could better support workforce and retirement goals.
For plan sponsors with a surplus and a prefunding balance, the key strategic question is whether a DB plan can be reopened to allow 401(k) employer contributions to be partially reduced or eliminated while existing surplus helps cover future DB benefit accruals. Under this strategy, employees could still receive some 401(k) employer match contributions while also earning a defined benefit. At the same time, the sponsor may be able to use an existing credit balance to satisfy required contributions.
A credit balance is essentially a credit created when an employer has made contributions to the DB plan in prior years in excess of the IRS minimum required contribution. That balance may be carried forward and used in future years to offset otherwise required minimum contributions, subject to applicable funding rules and elections. For sponsors of a frozen DB plan with a large credit balance, this strategy can represent a meaningful source of value if the plan is reopened and new accruals resume.
In the right situations, shifting all or part of the employer’s retirement contributions from the 401(k) plan to a defined benefit plan offers an attractive opportunity: Employees receive a more secure, employer-funded benefit, and the company can capitalize on its existing surplus in the frozen DB plan.
The key strategies and financial and regulatory issues that sponsors should consider when evaluating whether to reopen a frozen DB plan are outlined below.
Before reopening a DB plan, consider benefit design and workforce goals
First, the plan sponsor should clearly identify its goals, which may include a combination of lowering 401(k) costs, helping employees build more retirement security, accessing the DB plan’s surplus pension assets, and improving attraction and retention. Sponsors should consider what kind of benefit design best fits those goals, including a traditional pension formula, a cash balance design, or another approach.
A cash balance design can be attractive in a variety of situations. A cash balance plan is still a DB plan, but it presents benefits to employees in an account-based format, typically through pay credits and interest credits. Because of this structure, it often feels more familiar to employees who are used to thinking in 401(k)-style account balances. As a result, the benefits can be easier to understand, easier to communicate, and potentially more appreciated by the workforce than a traditional final average pay pension formula.
In addition, a cash balance design can provide flexibility in aligning retirement benefits with workforce goals. For example, different pay credit accrual rates may be provided for different employee groups, subject to applicable legal and nondiscrimination requirements. That flexibility can help sponsors tailor the program to support retention, reward targeted populations, or better align with broader compensation and talent strategies.
Considerations for employers that sponsor DB and 401(k) plans
If the goal is to reduce or eliminate employer 401(k) contributions and replace them with a DB accrual, the two plans should be evaluated together. Sponsors should consider how the change would affect employees and whether the combined retirement package is competitive and cost effective.
Importantly, sponsors do not need to take an all-or-nothing approach. A sponsor does not have to fully eliminate the 401(k) match in order to make reopening the DB plan effective. Instead, there may be a range of coordinated strategies available, including partially reducing the 401(k) match while adding a DB accrual or phasing changes in over time.
This coordinated strategy is distinct from some well-publicized examples, such as IBM’s changes to its retirement program, which drew attention because of its firm shift away from a 401(k) employer contribution structure. Unlike that approach, the employer match can be reduced rather than fully eliminated. A transitional approach may help ease employee concerns, preserve some participant choice and savings flexibility in the 401(k) plan, and still allow the sponsor to utilize the surplus in the DB plan.
Using a transitional approach can also support a broader retirement spending shift strategy. Rather than viewing DB and DC plans in isolation, the sponsor can evaluate total employer retirement spend across both plans and determine whether some portion of that spend would be more effectively delivered through a reopened DB plan. In many cases, the objective is not simply to cut costs but to reallocate retirement dollars in a way that improves benefit security, makes better use of existing pension assets, and supports workforce objectives.
Funding strategy and use of existing balances when reopening a frozen DB plan
Sponsors should understand how long the plan’s surplus and credit balances could support future benefit accruals, which would involve performing projections under multiple scenarios, including different investment, demographic, and interest rate assumptions. It is important to look not just at the short-term savings but also at whether the strategy is sustainable over time.
Why plan sponsors must reconsider their investment strategy before reopening a frozen pension
When a DB plan is frozen, the asset mix is often set to reflect the absence of new benefit accruals. Sponsors should revisit the investment strategy and model different asset allocation based on their risk tolerance, funded status, and long-term objectives.
It is just as important to coordinate the investment strategy with the contribution strategy and the intended use of surplus and prefunding balances. Selecting the right investment strategy with the right approach to using credit balances can help keep the plan’s surplus alive longer. For example, an overly conservative portfolio may reduce volatility but also limit return potential, causing surplus and prefunding balances to be drawn down more quickly as new accruals are added. On the other hand, an overly aggressive strategy may increase the risk of losses and can potentially decrease the funded position and shorten the period during which the sponsor can rely on existing balances rather than making new contributions.
The key is to evaluate these decisions together. A sponsor that wants to maximize the useful life of the surplus should consider how asset allocation, expected returns, downside risk, interest rate hedging, and the pace of credit balance usage work together. Projection modeling can help identify a strategy that supports ongoing accruals while preserving the funded status and reducing the risk that the reopened DB plan quickly moves from surplus to requiring contributions.
Nondiscrimination requirements: Another consideration for frozen pension plan sponsors
The DB plan’s frozen status may have suspended nondiscrimination testing in recent years. Reopening the plan reintroduces testing considerations under Sections 401(a)(26), 410(b), 414(s), and 401(a)(4). It is helpful to run tests in advance to identify any design issues early and determine if any changes to the benefit structure are needed.
This reevaluation is especially important if the sponsor is considering different accrual formulas for different active employee groups. For example, a sponsor may wish to provide higher pay credits or benefit accrual rates for certain populations based on business objectives, workforce demographics, or talent needs. While that flexibility can be valuable from a design perspective, it must be evaluated carefully to ensure the resulting benefit structure satisfies applicable coverage and nondiscrimination requirements. In particular, sponsors should assess whether the different groups are supportable, whether the overall allocation of benefits is nondiscriminatory, and whether testing can be passed on an ongoing basis as workforce demographics change over time.
Consider the accounting and financial impact before reopening a frozen pension
It is also important to review this strategy from an accounting and financial reporting perspective. Sponsors should understand how reopening the plan could affect pension expense, their balance sheet, and other financial measures.
Why communication is key to help employees consider both DB and DC plan assets
Many employees think about retirement mainly in terms of their 401(k) account, so communication will be important. Employees need to understand how a DB plan works and how it can improve their long-term retirement security.
Conclusion: Why the time may be right to reopen a frozen DB plan
For sponsors that froze their DB plans years ago, today’s funding environment may be a good reason to take another look. Reopening a DB plan can be a practical way to make use of surplus assets, rethink retirement benefits, and better align costs with workforce goals.
The right answer will depend on each sponsor’s funded status, credit balances, workforce demographics, and overall risk tolerance. But with careful modeling and input from and coordination among actuarial, legal, investment, accounting, and communications teams, a frozen DB plan could once again become a valuable part of an overall benefits strategy.