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Gary

Opening balance in cash balance plan

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I am in the middle of researching this but wanted some thoughts. I hear of cases where an employee has an opening cash balance account that is less than their pvab from old plan and that they will not accrue for a long time. And that this happens to older employees. Is it simply due to different assumptions, such as a higher interest rate for cash bal conversion? And are there restrictions as to what assumptions are used for opening account conversions?

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Yes, it is often simply due to differences in interest rates. This was common pre-GATT when a plan sponsor had to use the PBGC interest rates which subsidized lump sums. The conversion to initial cash balance account was done using more reasonable interest rates (such as 30-year treasuries). Since the 30-year treasuries were higher than the PBGC interest rates, the opening cash balance account was lower than the lump sum the employee could have received if he terminated employment (if the plan permitted a lump sum).

Of course, no reduction in the lump sum is permitted, so the actual lump sum payable on termination is "frozen" at the old level until the cash balance account catches up.

Several items on this that have been missed in the popular press. Although the employe's lump sum might be frozen for a while, he is still earning additional monthly accrued benefits. This increase is equal to the "contribution credit" to the cash balance account, converted to an annuity at age 65.

Second, the plan sponsor is simply removing the mandatory lump sum subsidy required under pre-GATT rules. Arguably (although I don't really think employees will buy this), they are losing something (the subsidy) that they really should never have had!

AS far as whether or not there are restrictions on the lump sum interest rate, I'm not sure. I presume anything that is reasonable is OK. And that applies to both the interest rate and mortality table used in the conversion.

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