How to Use a Pension Plan Surplus
Rising surpluses in corporate DB plans create opportunities to enhance existing benefits or create new plan designs.
Since interest rates began rising in 2022, corporate defined benefit (DB) plans have enjoyed a marked increase in their funded status. At the end of March 2025, the 100 largest corporate DB plans were 104.1% funded on an accounting basis, with a surplus of $51 billion, according to Milliman.i The $51 billion figure likely includes underfunded plans, so overfunded plans’ actual aggregate surplus is almost certainly higher.
Large surpluses provide new opportunities to enhance benefits for participants and create additional flexibility for corporate sponsors. To help overfunded plans develop their own surplus management strategy, we’re exploring several ways to put surpluses to use.
Defining “Excess” Surplus
How much surplus is too much? To answer that question, a sponsor must first consider whether the plan is open, closed, or frozen.
For example, consider an open plan that is 120% funded and expects to continue providing benefit accruals to its employees. The surplus could be used as a reserve for future contributions, so in this case the plan may not have more surplus than it needs. A closed plan also may want a substantial cushion, though it may not need as much surplus as an open plan.
By contrast, frozen plans may have little need to hold substantial excess assets. The strategies below pertain primarily to them.
Protect Funded Status Gains First
Before considering any potential uses for a surplus, plan sponsors should first lock in their current status as much as possible. Markets and interest rates fluctuate over time, and corporate pensions have cycled through periods of surplus and deficit in the past. By taking advantage of today’s surplus environment and locking in overfunded status, plan sponsors will be in a better position to meet their primary obligation to participants: paying out earned benefits in the future.
De-risking through liability-driven investing (LDI) is the preferred approach for taking advantage of an improved funded status. LDI enables plans to assemble a diversified mix of fixed income investments that closely match the specific characteristics of their liabilities, helping minimize tracking error between asset values and a plan’s liabilities. Customized, effective hedging programs can help sponsors prepare their plans for a wide range of future scenarios.
Options for Using Additional Surplus
After plan sponsors have locked in the assets needed to meet liabilities, they can begin exploring other uses for their surplus. The size of the surplus will help determine the relevance of the options described below. For example, small plan surpluses (for example, funded ratios of up to 105%) may be best held as a cushion against risks that can’t be hedged. Companies with large surpluses — say, 120% for a frozen plan — may have several ways to use the excess money to benefit both participants and their businesses, rather than leaving it locked up in the plan.
Consider these options for using surplus funds to expand participant benefits and add new plan designs:
1. Enhance defined contribution plan contributions
Companies with a defined contribution (DC) plan can use surplus DB funds rather than cash to make nonelective contributions on behalf of DC plan participants. This approach can help companies bolster the retirement savings of employees in their DC plans, but it comes with a few complications.
First, companies must terminate their DB plan before they can transfer the surplus into a DC plan. Second, current law requires companies to make the contributions over seven years, and the surplus may be much larger than nonelective contributions otherwise scheduled over the period.
Both of those requirements may be poised to change. One proposal under consideration would allow companies to use DB surplus funds as nonelective contributions to a DC plan without requiring termination of the DB plan. If Congress approved this change, it would allow companies to use only the amount of the surplus needed to make planned nonelective contributions.
2. Enhance retiree health benefits
For the smaller group of companies that offer retiree health benefits, current law allows a transfer of surplus DB assets into 401(h) accounts that need additional funding. However, many 401(h) accounts are already significantly overfunded, and current regulations restrict how companies can use those funds.
Again, though, a proposal from the American Benefits Council would allow companies to use 401(h) accounts for more purposes, including active employee health benefits. Such a change would make this option attractive to a larger group of plan sponsors.
3. Use a cash balance feature
Sponsors also could use pension surpluses to provide cash balance benefits to plan participants. While cash balance plans are technically DB plans, they function in many ways like DC plans: Benefits accrue as cash amounts, and employers add annual “pay credits” and “interest credits” to them.
Whether a plan is open, closed, or frozen, surpluses can be applied to a new cash balance formula or an existing cash balance feature. For example, rather than making a nonelective 401(k) plan contribution worth 3% of pay on behalf of all employees, a company could stop funding the 401(k) and instead give employees a 3% contribution credit in their cash balance accounts. This approach offers employees a valuable advantage over 401(k) plans: Employers, not employees, bear the risk of loss in a cash balance plan, and the benefit is covered by the PBGC.
Providing benefits via a cash balance plan also offers benefits to employers, which can use the DB surplus rather than cash to make retirement contributions for at least a certain period of time. This option also allows companies to demonstrate in a concrete way how the company is helping more employees benefit from a DB plan surplus — potentially creating goodwill that helps attract and keep employees.
Some companies are discussing a novel approach that would allow employees to choose between a traditional 401(k) and a cash balance plan. For example, a company may offer a 3% contribution to an employee’s 401(k) or a 3.5% contribution credit in a cash balance plan. The higher contribution amount in the cash balance plan could be more attractive to both parties: It gives employees a new retirement account in which the employer bears the burden of investment losses, and allows the employer to fund the accounts with DB surplus funds. Companies considering this approach must analyze it carefully, weighing factors such as the tax implications of each choice and the potential requirement for nondiscrimination testing in the two plans.
From De-Risking to Surplus Management
Improvements in funded status have created a positive path forward for corporate DB plans. As plans approach 100% funded status, sponsors can implement enhanced de-risking strategies that preserve existing gains and increase the likelihood that the company will meet its liabilities in the future. From that point, any additional surplus growth provides flexibility to use the funds in ways that benefit both participants and plan sponsors. Plan sponsors can examine options for using their DB plan surplus in the most effective ways, based on factors such as their employee and retiree populations, current benefit mix, and tax and cash flow considerations.
Please reach out to your relationship manager if you would like to discuss how to protect your current funded status or review potential strategies to put your DB plan surplus to use.