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Where's the Fix?


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Clara Peller asked "Where's the beef?" A.T.A. asks, "Where's the fix?"

PPA purported to make pension plans safe for America, end all wars, and obliterate tooth decay.

A calendar year DB plan uses the preceding September segment rates, which for 1/1/2010 meant 5.03, 6.73, and 6.82. The liability held for A. Participant was $222,000. The Plan distributes lump sums based upon the segment rates as of the first day of the calendar quarter that precedes the calendar quarter of distribution. That's a mouthful but by example, the July 1, 2010 segment rates are used for a December 1, 2010 distribution. The July rates were 2.83, 4.66, and 5.26. Under these rates, a lump sum of $282,000 will be distributed, which is 27% greater than the amount reserved.

So what exactly has PPA fixed other than constructing an overly complicated basis for another undelivered political promise?

The material provided and the opinions expressed in this post are for general informational purposes only and should not be used or relied upon as the basis for any action or inaction. You should obtain appropriate tax, legal, or other professional advice.

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1. And if there were no PPA, lump sums would still be based exclusively on 30-year Treasury rates, which were at or below 4% for the relevant period, surely producing lump sum values that would have been even higher relative to funding (don't expect that anyone would be basing funding on 4% unless compelled by law to do so).

2. Take heart - the funding rates for 2011 will be lower than those for 2010 and can be expected to decline until they get down to where the lump sum segment rates are, especially once the transition period for lump sum rates is over.

In the long run, the funding rates and cashout rates will tend, on average, toward the same level. The only difference will be between spot rates and 24-month averaged rates tied to the same marketplace, so no upward or downward bias should be anticipated unless rates themselves have a long-term tendency to upward or downward mothion.

Probably would have been better had the plan set its stability period equal to the plan year. This way, there is more volatility in lump sum values. But again, in the long run it should come out relatively even, especially if interest rates stabilize. You will certainly see some occasions where you were holding $220,000 as a funding liability and wound up cashing the person out at $150,000.

Always check with your actuary first!

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My 2 Cents is stating facts. Andy is ranting, and justifiably so.

Yes, the funding rates and LS rates will move toward each other, but never meet. The larger problem is implied by Andy's example: use of the stability period can/will distort payments away from "true" market value at the date of payment.

The answer to the question:

So what exactly has PPA fixed other than constructing an overly complicated basis for another undelivered political promise?
is that Congress has created another bureacracy/set of rules, rather than fixing the problems with the prior ones.

Here is my preferred PPA rules:

1. Use pre-PPA section 412, gradually raising the 90% test under 412(l)(9) to 100%.

2. Change LS interest rates to equal the current liability rates

3. Require all Americans to hire an actuary.

(Instead of 900 pages, PPA would have been 3 pages. Just think of all the trees that could have been saved.)

End of rant. :)

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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As long as we're talking solutions, horsewhip the guy who ever tied lump sum interest rates to some fictitious index that may not bear in time or substance any resemblance to how assets are invested or even the fixed interest market at the time of distribution. So, given that you're dealing in fiction, why not go for simplicity? Instead, allow for standard fixed interest rate a la 401(a)(4). The low end of the interest rate range would be used for 415. Then, you would adjust for 415 only for years of participation, distribution age, and distribution form. Then, guess what guys? Plans would no longer be funding to a moving target and excess assets would develop only if Plans invested aggressively and succeeded.

The material provided and the opinions expressed in this post are for general informational purposes only and should not be used or relied upon as the basis for any action or inaction. You should obtain appropriate tax, legal, or other professional advice.

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