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Andy the Actuary

Relative Values Interest Rate

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A plan sponsor is shutting its doors and all employees covered under the DB Plan will be terminated. The Plan offers life only, J&50, J&100, 10C&L, 20C&L, and lump sum. Actuarial equivalence for determining monthly forms is 71GA and 6.50%. Any problems with saying in the election package that monthly forms are actuarially equivalent and same value and then illustrating lump sum relative to life only form. Because of low lump sum interest rates, the lump sum will be about 150% relative to the life only. Of course, anyone who both reads and understands this will be led to elect a lump sum. Clearly, the results look vastly different if for example, we were to use the lump sum basis for determining relative values. The disclosure does make the statement that using a different determination basis would produce different relative values.

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Not an answer to your question, but have you considered, and does the plan permit, settling all plan obligations via group annuity purchase? I'm not saying it is cheaper than 417e lump sums, just that there is no harm in checking.

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Not an answer to your question, but have you considered, and does the plan permit, settling all plan obligations via group annuity purchase? I'm not saying it is cheaper than 417e lump sums, just that there is no harm in checking.

David, thank you. Isn't really feasible. Employer is selling assets of corporation. Plan (a negotiated plan no less) permits immediate lump sums upon termination of employment irrespective of Participant's age and amount of lump sum, so purchasing deferred annuities with lump sum option is not going to help. Worse, closing date is mid-June (I just learned all of this this week) so we are scrambling. In this situation, best would be if all participants elect lump sum payment which is virtually assured irrespective of relative values. I simply don't want to put the client in jeopardy by intimating to participants that lump sum is far and away the surperior choice and more or less a Hobson's choice. On the other hand, . . .

Am I missing your point. If so, would appreciate your comment.

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Guest GMP

My understanding is that you can use any reasonable rates to demonstrate that all annuities are relatively equivalent, but, the lump sum must be compared to the QJSA using the 417(e) rates.

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My understanding is that you can use any reasonable rates to demonstrate that all annuities are relatively equivalent, but, the lump sum must be compared to the QJSA using the 417(e) rates.

It sounds as if you're saying that you must compute the present value of QJSA using the 417(e) rates and then compare the lump sum to it. If this is what you're saying, would you please provide the reference in the regulation that provides for this as I seem to be missing it. There was some languange about not having to comply earlier with regs if QJSA was most valuable using 417(e) rates. I'm confused.

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Guest GMP

Sorry, I worded that very carelessly. My understanding is that if you calculate your lump sum using the current 417(e) rate it is automatically deemed to satisfy the realtive value requirements with respect to the QJSA. However, if you use something other than the current 417(e) rates to calculate the lump sum you will then have to compare it with the QJSA using the current 417 (e) rates.

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Sorry, I worded that very carelessly. My understanding is that if you calculate your lump sum using the current 417(e) rate it is automatically deemed to satisfy the realtive value requirements with respect to the QJSA. However, if you use something other than the current 417(e) rates to calculate the lump sum you will then have to compare it with the QJSA using the current 417 (e) rates.

Thank you. Pardon me for being obtuse: So, then if we are using 417(e) to compute lump sums and show all the relative values, including lump sum, using 71GA and 6.5% interest, you believe this satisfies the regs even though it produces a very high value for the lump sum?

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Guest GMP

On the surface it sounds like a good idea, but my concern in preparing forms in that manner would be that it might not be reasonable. Attached is an article from ASPPA. Take a look at the section entitled "The Use of the Term “Reasonable Actuarial Assumptions”.

rel_val_32906.pdf

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Thank you for the download which if I read correctly, supports the okayness of using the 71GA, 6.50% in that "The term "reasonable actuarial assumptions" applies when comparing optional forms of benefit that are not subject to the IRS Sec 417(e) rates and tables." It is certainly reasonable to compare such forms on the basis on which their derived unless such basis was de facto unreasonable.

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I don't think you should have posted copyrighted material GMP. I will leave it to moderators here on the board who are more familiar with ASPPA requirements and let them take it down if needed.

As for the original question, if you are comparing all forms of benefit (other than those subject to 417(e)) to the QJSA and your other forms of benefits are actuarially equivalent to each other, then by definition your relative values will be 100%. Then when comparing those benefits subject to 417(e) to the QJSA using 417(e) rates, again you are at a 100% if the QJSA is the normal form of benefit.

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As for the original question, if you are comparing all forms of beneift (other than those subject to 417(e)) to the QJSA and your other forms of benefits are actuarially equivalent to each other, then by definition your relative values will be 100%. Then when comparing those benefits subject to 417(e) to the QJSA using 417(e) rates, again you are at a 100% if the QJSA is the normal form of benefit.

So, without regard to your advocating whether or not one should use such presentation, am I correct that in your opinion the described approach is consistent with the reg?

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I am not clear on which approach you mean. 1.417(a)(3)-1©(iv) is a nice cite for you.

(I need to type slower or better.)

Okay, so there is no mistake about what we're talking about, here is a possible paragraphs:

Relative Values Comparison

Federal law requires that your election package disclose the comparative value of each benefit payment option. The

purpose of this disclosure is for you to be able to compare the relative value of each payment option. Comparison is

made by converting each optional form of payment to its actuarial present value and expressing the present value as

a percentage of the present value of the "Qualified Joint and Survivor" form of payment. All optional forms of payment

are approximately equal in value.

The comparisons are based upon the 1971 Group Annuity MortalityTable and 6.50% interest. Using different actuarial

assumptions would affect the comparisons. All comparisons are based upon average life expectancies. The relative

value of payments ultimately made will depend upon actual longevity. Consequently, you should consider your personal

health as well as the health of your designated beneficiary, if applicable, and consult with your personal financial advisor

in your decision of which optional form of payment best fits your needs.

Now, we we were to illustrate these comparisons, all would be at 100% except for the the QJSA, which might be at 150%.

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I don't understand your last sentence. Aren't you making an actuarially equivalent comparsion? If so, how is the QJSA 150% of other benefits? It should be 100%.

"Using different actuarial assumptions would affect the comparisons." --- Would it?

"The comparisons are based upon the 1971 Group Annuity MortalityTable and 6.50% interest." --- Benefits subject to 417(e) are not being compared under these assumptions.

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I am being obtuse. I think I got it. It seems that all that would remain is to state the basis under which benefits for the relative value of the lump sum are determined, namely the 417(e) stuff.

Thank you.

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You don't have to even state the mortality and rates used if you give the option for the participant to request the information. I doubt you would know the marital status and spouse's date of birth for people beforehand anyway, so you already have to give them the right to request a more specific calculation. That's why to me it seems easier to treat the mortality and interest rates the same way.

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You don't have to even state the mortality and rates used if you give the option for the participant to request the information. I doubt you would know the marital status and spouse's date of birth for people beforehand anyway, so you already have to give them the right to request a more specific calculation. That's why to me it seems easier to treat the mortality and interest rates the same way.

There are only 14 participants so we will know spouse's stuff in advance. Perhaps I differ from most but my benefit election packages always illustrate the amounts under the various options using the spouse's date of birth.

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I am not sure I follow this conversation....

First, it is correct that you can compare the annuity forms using one set of assumptions and the 417e forms using 417e rates (in fact you must use 417e rates for the 417e forms)

If the plan offers a life annuity to married participants, you can do all comparisons to the life annuity. This is helpful if life only is your normal form.

It is not necessarily true that if you use 417e rates to compute your lump sum, that you will come up with a 100% relative value. For instance, if your normal form is a life annuity and your QJSA benefit is actuarially equivalent to the life only using the plan's actuarial basis (something other than 417e), and your plan uses the QJSA comparison, the present value of the QJSA benefit will not equal the lump sum payable under the plan, because of the differing actuarial bases when you convert the single life to a QJSA with one basis and then the QJSA to a lump sum eith 417e rates.

In fact, if the benefit is payable before NRA and the plan uses anything other than 417e rates as its actuarial equivalence calculating the QJSA, it will not yield a 100% relative value.

In your case, I assume all 14 people are not at NRA. I assume the immediately commencing annuity, whether life or QJSA, is calculated by taking the actuarial equivalent at 6.5% of the NRA annuity.

For someone age 55, you will compare

--the lump sum actually payable at age 55 to

--the PV of the annuity actually payable under the terms of the plan at age 55, with the PV calc'd using the 417e rates.

Since your plan's discount will greatly exceed the 417e discount due to the high interest rate, a greater reduction will apply to the annuity benefits and the relative value of the lump sum will be much much higher than that of the QJSA or life annuity.

The ONLY time, in your case, that the relative value will be 100% is if you choose to compare on a life annuity basis (assuming thats the normal form) for someone at NRA

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If a participant's accrued benefit is at the 415 limit, the Lump Sum will be limited to the 5.50% lump sum calculation. My question : in this plan all other forms of payment are actuarially equivalent to the QJSA ( which is the actuarial equivalent of the normal form-SLA) and are not limited by the 5% calc, thus the lump sum would have a much lower relative value; but if the mortality and interest assumptions plan rates were used, all benefit options would have the same actuarial value. Our plan uses a 5% interest rate and 94GAR for AE. Is it appropriate to report 100% relative value here? It seems reporting a 50% relative value for the lump sum is just not right.

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