A frozen pension occurs when a company offering a guaranteed retirement benefit plan to an employee in the form of a pension stops contributing to the plan. Companies do this as a way of saving money and often switch employees to a 401k plan, which requires the employee to contribute some or all of the money to the account. Employees with a frozen pension will generally receive the amount they have already accrued through a lump sump or through regular annuity payments. New employees hired to a company with a suspended pension program will not receive any pension benefits.
In difficult financial times, companies may look for methods to improve their bottom line, which, unfortunately, often comes at the expense of their employees. Pension plans were often used by companies to reward loyalty by their employees. Known as defined benefit plans, pensions paid out retirement income to employees based on their salaries while working and their years of service. As pension plans become more and more costly, many employers have decided upon a frozen pension, which can affect the retirement plans of some or all of its employees.
There are generally two types of frozen pension arrangements undertaken by employers. In a soft freeze, employers still contribute to employees with existing plans based on the original terms, but new hires do not receive a pension. With a hard freeze, even employees with existing plans are denied any future benefits outside of what they had already amassed before the freeze. A hard freeze is often a precursor to a company doing away with the pension plan completely.
When a frozen pension occurs, employees are generally given the opportunity to enter into a 401k retirement plan. A 401k plan allows the employee to contribute some of his regular paycheck into a retirement account, and the employer may match some or all of that amount. The account is then invested, meaning that the capital within rises and falls depending on the market. Unlike pension plans, nothing is guaranteed to the employee, although a wisely-invested 401k plan can still provide excellent retirement income.
Employees with money already amassed in a frozen pension are still entitled to that money. Some companies may dictate the terms of the payout to the employee while others may leave the choice up to the workers holding the frozen plans. In some cases, the money in the plan may be distributed to the employee in one lump sum payment. Other employees may receive annualized income in the form of a monthly check, thus providing a steady stream of retirement benefits.