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Gary

Funding of Cash Balance Plans

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Say a CB plan provides for allocation credits of 4% and interest credits of 5%. When doing a actuarial val. can it be done directly with those amounts stated above (like a money purchase plan) as the minimum funding requirement or does each credit have to be converted to an annuity and then valued as a present value of the annuity accrual? For example if total compensation was 1,000,000, would the funding requirement be $ 40,000 (@ 4%) plus interest credits or do we have to convert to an annuity.

When providing top heavy benefits is it true that then we need to convert the 2% accrual to a dollar allocation?

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The funding of a cash balance plan is just like the funding of any other defined benefit pension plan ... you have a great deal of flexibility.

The client (at least technically) selects the funding method, and the actuary selects the assumptions.

In your example, if the pure unit credit method was used, and if the actuary assumes investment earnings of 5% per year, no turnover and no preretirement mortality, the first year contribution would be exactly 4% of payroll. In future years, investment gains or losses (compared to this 5% assumptions) would decrease or increase the contribution.

However, additional flexibility can be obtained as follows. An investment return assumption above 5% along with pure unit credit funding would result in a contribution of less than 4% of payroll. Alternatively, using a projected benefit funding method (e.g., entry age, projected unit credit, aggregate) along with a 5% investment return assumption would produce a contribution above 4% of payroll, Naturally, the ultimate annual cost is a function of the actual investment results, and in your example, the ultimate annual cost would probably be below 5% of payroll.

(For simplicity, let's not get into turnover and mortality assumptions in the above discussion.)

I would recommend using funding methods that create a contribution range. One advantage of a cash balance plan over a money purchase plan is that the contribution can be varied depending on the client's cash position. A money purchase plan offers no such flexibility.

(Technically, you do not have to base your contribution on the present value of the age 65 annuity if your plan design allows you to pay out lump sums equal to the cash balance plan account balance, as long as you assume that 100% of terminating or retiring employees elect the lump sum.)

On your question about top heavy benefits, yes, the minimum is a 2% annuity. If a lump sum is being provided (as it clearly is in a cash balance plan), the lump sum dollar amount must be at least equal to the actuarial equivalent of the 2% annuity.

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Say if a plan has a 4% allocation and a 5% interest and we do a one man unit credit valuation. No assumed turnover or pre ret mortality. Then if person is still active (and earned $100,000 per year) one year later, the only gain or loss can be due to investment and the person would get an allocation of $4,000 plus 5% interest credit. Is there a way for a liability gain or loss? It almost seems that a liability gain or loss could only occur if he took a payment option other than the assumed option of lump sum (which is set equal to account balance). Or at least a liability gain due to termination earlier than expected would cause an equal asset loss and be a wash.

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Richard if you respond to this topic, I am interested in having your email address. I thought on occassion we would be able to correspond in a little more detail on certain occassions. Thank you very much if you are interested. My email is mevoco@mindspring.com. Thanks, Gary

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