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ATR article makes questionable claims?


Guest Franklin Evans
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Guest Franklin Evans

I must admit little exposure to gov't plans, and I would like to know answers to the following: gov't DB plans typically use 10-year or more vesting schedules?; is there an example of a public-sector plan that does not refund employee contributions?; gov't DB plans are not subject to Minimum Funding Standards? and these plans do not need the services of an enrolled actuary?

I must admit to needing effort to keep a straight face while reading parts of the article, but its use of statistics and descriptions of "typical" plan provisions is disturbing. Please help me clarify this.

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Guest CVCalhoun

Hmm, don't know what article you are talking about. But I can at least answer some of your questions:

  1. In the past, governmental defined benefit plans, like private sector defined benefit plans, often used 10-year vesting. When private plans were required to switch to no more than 5-year vesting, governmental plans were exempt from that rule, and many of them did not change right away. However, the trend since then in most states has clearly been for governmental plans to try to match private sector vesting. This is a cumbersome process--many governmental plans are embodied in statutes which may be hard to amend, or are subject to state regulation which prevents them from moving in ways they would like to. Thus, there are probably still a lot with 10-year vesting, but the trend is definitely the other way.
  2. Every governmental plan I have ever worked with has refunded employee contributions.
  3. Governmental plans are not subject to the minimum funding standards in federal law, i.e., the Internal Revenue Code and ERISA. However, they are typically subject to state law funding requirements.
  4. Governmental defined benefit plans are not required to have an enrolled actuary sign off on their Forms 5500--because they are not required to file Forms 5500. (You can click here to see the IRS Announcement which eliminated their Form 5500 filing requirements.) However, I have never known one able to do without the services of an actuary--e.g., to determine the amount of funding necessary in order to be able to provide the benefits called for by the plan.

Hope this helps!

[Note: This message was edited by CVCalhoun]

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More comments:

1. We have a fair number of govt. plans, mostly Hospitals owned by the county. 5-year vesting is the most common. there are a few that use 10-year, 10-year graded, or 7-year cliff vesting.

2. I have one govt. plan that improved its benefit formula a few years ago. the only way they could sell the increased cost to the managment board was to implement EE contributions on a pre-tax basis. The plan does allow a vested terminated EE to receive a refund of EE contributions but it carries a big penalty: permanent forfeiture of all ER provided benefit.

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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Guest Franklin Evans

The article in question is linked thru the BL main page, bullet dated 11/04. I plan to respond to the ATR and the author concerning the tone of the article being one of propoganda rather than an attempt to educate the reader. Thank you both for responding.

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Guest CVCalhoun

Ah, okay! For anyone interested in reading the Americans for Tax Reform article, you can see it by clicking here. It is an argument in favor of having governmental plans change from defined benefit to defined contribution format. And Franklin Evans is right--it reads more like propaganda than education, since it completely ignores the advantages of defined benefit plans, rather than just arguing that the advantages of defined contribution plans outweigh them.

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