New Bill Poised to Unlock Pension Surpluses for Retirement Savers

Key Takeaways

• Congress is considering a bill allowing DB plans to use surplus assets to fund DC plans
• This law may incentivize plan sponsors to maintain well-funded DB plans instead of terminating them
• While meaningful safeguards exist in the proposal, we believe three additional measures—funding thresholds, reliable discount rates and long-term investment strategies—should also be implemented

Overfunded pension plans don't have to die—they can live on in a 401(k) plan.

A new bill under consideration by Congress aims to unlock pension surpluses, giving more flexibility to sponsors of DB (defined benefit) plans.  

Pension surpluses arise when pension assets, which are intended to secure participants’ earned benefits, grow faster than the liabilities they are meant to cover. Once benefits are fully funded and protected through a liability-driven investing strategy, a surplus can build up.

While pension surplus can be used in a variety of ways to help participants and/or plan sponsors, some sponsors are not convinced it has meaningful value beyond what’s needed to terminate the plan.

With average corporate pension funded status at its highest level since before the Global Financial Crisis, and many sponsors debating what to do next with their overfunded plans, now is an opportune time to explore more possible uses for pension surplus. One of the most promising proposals—under consideration from lawmakers—is to allow pension surplus to fund defined contribution (DC) benefits, such as 401(k) plans.  

The concept of using pension surplus for DC plans is not new, but the current momentum is unprecedented. A bill has been introduced in the U.S. Senate—the Strengthening Benefit Plans Act of 2025—that would allow surplus transfers from DB to DC plans if the following conditions are met¹:

Under the proposal, transferred assets would not be treated as employer income, would not be taxable and would not be tax deductible. These provisions would take effect in 2026.

This framework is similar to the rules that govern pension asset reversions during plan terminations. The difference is that surplus transfers would be allowed for existing—rather than terminating—plans. This removes a possible incentive to terminate a DB plan to directly access the surplus.³

If enacted, we expect several outcomes:

As we have discussed, pension surplus uses can benefit either sponsors or participants— sometimes both—and sponsors must continue to navigate the distinction between fiduciary and settlor functions. 

While we view this proposal as a step in the right direction and an important development for pension sponsors, we also recognize the potential for misuse if safeguards prove insufficient. Pension surplus should never be used in a way that jeopardizes participants’ benefit security.

The conditions outlined above provide meaningful safeguards for DB participants, including the elevated funding threshold. We recommend three added measures, which could be incorporated into the regulations or adopted by sponsors as best practices:

1. Use the PBGC’s standard method (rather than alternative) for the discount rate basis when determining the 110% funding threshold. The standard method is closer to marked-to-market, while the alternative basis can use a 24-month average of discount rates, which may not fully reflect current market conditions.
   
   
2. Adopt an investment strategy designed to maintain full funding over the long term with a high probability of success. This can be checked by using stochastic asset/liability analysis to discourage overly aggressive asset allocations.
   
   
3. Measure liabilities using the present value of future benefits (PVFB) method, which accounts for future expected benefit accruals for non-frozen plans. This ensures anticipated benefits are adequately funded before the surplus is used.

If enacted, this legislation could reshape a path forward for overfunded DB plans. Allowing surplus assets to enhance DC benefits or reduce employer funding obligations may give sponsors compelling reasons to maintain, rather than terminate, well-funded plans. This is a development worth monitoring closely.

Allowing surplus assets to enhance DC benefits or reduce employer funding obligations may give sponsors compelling reasons to maintain, rather than terminate, well-funded plans.

If enacted, expect this bill to breathe new life into overfunded DB plans.

¹ The bill also includes significant adjustments to the use of excess retiree health assets, which are not covered in detail here.

² PBGC stands for Pension Benefit Guaranty Corporation

³ This closely follows a proposal from the American Benefits Council in 2023, which was suggested primarily as a means to stem the perceived tide of plan terminations if pension surplus was not unlocked for existing plan sponsors.

⁴ Beyond Traditional LDI: The Role of LDI Diversifiers in DB Plan Portfolios