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Asset Smoothing


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6 replies to this topic

#1 ubermax

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Posted 24 December 2008 - 10:49 AM

The description of asset smoothing in the proposed 430 regs seems to mimic Approval 11 of Rev.Proc. 2000-40 (i.e. average value without phase-in).

H.R. 7327 (WRERA) seems to amend the proposed reg by introducing expected earnings into the mix using a rate no greater than the applicable segment 3 rate.

Algebraically do we end up with one of the smoothing methods in 2000-40 or is it new and to be described in forthcoming guidance ?

#2 david rigby

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Posted 24 December 2008 - 11:14 AM

IRS guidance is likely, and needed. IMHO, it would be reasonable, at least in the meantime, to look to Rev.Proc. 2000-40 for expected smoothing structure; just can't go to five years anymore.
I'm a retirement actuary. Nothing about my comments or advice is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, certainly not all the time, it might be reasonable to interpret my comments as actuarial advice.

#3 Andy the Actuary

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Posted 24 December 2008 - 11:43 AM

And question is which 3rd segment rate are they talking about. For example, suppose it's 2010. Do you simply apply 2010 3rd segment rate retroactively or do you employ 2008 rate for 2008 and 2009 rate for 2009?
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#4 dmb

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Posted 26 January 2009 - 12:23 PM

The description of asset smoothing in the proposed 430 regs seems to mimic Approval 11 of Rev.Proc. 2000-40 (i.e. average value without phase-in).

H.R. 7327 (WRERA) seems to amend the proposed reg by introducing expected earnings into the mix using a rate no greater than the applicable segment 3 rate.

Algebraically do we end up with one of the smoothing methods in 2000-40 or is it new and to be described in forthcoming guidance ?


Should the expected earnings be based on a short term assumption or long term assumption?

#5 david rigby

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Posted 26 January 2009 - 01:39 PM

Should the expected earnings be based on a short term assumption or long term assumption?

I'm not sure what you mean? As Andy points out, it appears the maximum assumed earnings rate (for purposes of smoothing) is the third segment of the funding rates (Sec. 121(a) of WRERA).
I'm a retirement actuary. Nothing about my comments or advice is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, certainly not all the time, it might be reasonable to interpret my comments as actuarial advice.

#6 dmb

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Posted 26 January 2009 - 03:12 PM

Should the expected earnings be based on a short term assumption or long term assumption?

I'm not sure what you mean? As Andy points out, it appears the maximum assumed earnings rate (for purposes of smoothing) is the third segment of the funding rates (Sec. 121(a) of WRERA).


I agree that the MAXIMUM assumed earnings rate is the third segment of the funding rates. However, that doesn't necessarily mean that rate will be the assumed earnings rate. For example, if a plan has most or all of its money invested in a money market, or similar account, the assumed earnings rate would not necessarily be as high as 6.43% (Jan 2008). While the current money market rate may be only 1.5%, over the long term, maybe 4% is a reasonable expected rate of return.

#7 david rigby

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Posted 26 January 2009 - 05:51 PM

Sounds like an actuarial assumption to me.
What do you think?
I'm a retirement actuary. Nothing about my comments or advice is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, certainly not all the time, it might be reasonable to interpret my comments as actuarial advice.