Why many companies should terminate defined benefit plans

Thanks to a convergence of events — strong stock market gains coupled with rising interest rates — this might be the best time in years for companies to terminate defined benefit plans.

The use of defined benefit pensions has been in long-term decline as employers have moved away from plans that guarantee incomes for retirees, who are living longer, and instead have offered employees 401(k) or similar retirement savings plans.

All told, private companies have frozen 37% of defined benefit plans, either closing them to new employees or freezing accruals entirely, according to U.S. Bureau of Labor Statistics data. Now, many companies should consider going further: terminating defined benefit plans and giving participants the choice of either taking a lump-sum payment or a set annuity.