Cross Tested Hybrid 412(i) Plan

[AndyH]

How did we all miss this one? Dom et al must have been right!

[Link removed-too late for the fun.]

maybe I should have put this under humor? This definitely rates a WOW.

[Blinky the 3-eyed Fish]

It made me laugh.

[AndyH]

Blinky, did you happen to look at the numbers? Both the PS and traditional DB numbers make absolutely no sense, never mind the "hybrid" numbers.

[Guest DOM]

Andy, maybe you would like to email me and explain what exactly you mean by referencing my name in your childish posting? be sure to include your phone number. dfirmani@firmanibenefits.com

[AndyH]

Are you not the leading 412(i) proponent on these Boards? Or was that before the IRS' recent announcements?

But I guess you're right. I should have let you go away quietly with your last comment. And I quote:

"To WDIK: OK so I lied about 8/28 being my last posting. I have just one more thing to say and this really is my last post.

MISSION ACCOMPLISHED!!!!!!!!!!!! "

[Blinky the 3-eyed Fish]

Is there going to be a fight at recess?

[Guest DOM]

Andy, I still don't have your phone number! (what are you afraid of?) had you not brought my name up in vain that would have been my last posting. Incidently the new proposed regs will have no effect on the way we do 412i plans. I am very glad to see the IRS taking action. In fact I'm one of the rascals who provided questionable design information for review. Your right at least about one thing. I am a proponent of 412i plans when done properly and used in the right situation. Your condensending reference to my prior postings is misguided. I don't care in the least if anyone likes or dislikes these plans, in fact fewer people doing them is better for our bottom line. My prior postings on this subject were somewhat self- serving to the extent I was exposing the self-righteous,pernicious and venomous attitude prevalent in ASPA and espoused by the more vocal demi-gods' towards life insurance in general and especially those who sell it. I have presented some of the comments from that dialog at several industry meetings to considerable laughter, (thank you). Lets talk....

Blinky, I can assure you it wouldn't be much of a fight, at recess or otherwise.

[Blinky the 3-eyed Fish]

Blinky, I can assure you it wouldn't be much of a fight, at recess or otherwise.

This takes me back to junior high.

Dom, push out the hate and bring in the love! You have to admit you are a bit combative.

[WDIK]

Dom,

Since you are posting again, would you mind sharing your thoughts on the "hybrid 412(i) plan" referenced in this thread?

[AndyH]

Careful guys:

http://www.jawsmovie.com/images/temp/quint1.gif

[Guest DOM]

WDIK, I haven't looked at it in detail, maybe time this weekend. At first blush it looks agressive and not in the style that I would use. Obviously it is a marketing piece that didn't go through any due diligence. I would also guess the author was not a pension technician.

Blinky, your point is well taken, but I'm surprised that you haven't found some of the 412i attacks or for that matter any insurance issue over the past six months "combative" especially the unethical inuendos towards insurance people. If not combative how would you define them?

[AndyH]

meant in humor, not in a combative way. There are far more jokes on these boards about actuaries and pension geeks than there are about 412(i) salesmen. And with representations from your colleagues like the one I linked to, how can we not be humored?

Go back and read the back and forth in your earlier posts. Nothing combative except from you. This is combative:

"....self-righteous,pernicious and venomous attitude prevalent in ASPA and espoused by the more vocal demi-gods'

Time to lighten up, Dom.

[Blinky the 3-eyed Fish]

I don't think the talks of unethical insurance salesmen are innuedos at all, but downright accusations. I wholely realize that a few bad apples are spoiling the bunch here, but I happen to feel there are a few more bad apples in the bunch of insurance salesman than there are in the actuarial field. Money corrupts and there was a lot of money to be made with 412(i) plans loaded with life insurance. I have seen too many of the marketing materials to think these are isolated incidents.

Does that mean I think you are a bad apple Dom? No. But I certainly don't think you can defend the actions of some of your colleagues to the point of being combative when their integrity is questioned. Their integrity should have been questioned. It's not just ASPA, but the IRS representatives and everyone in the pension field doing the questioning.

My mortgage broker fully admits there are "shady characters" in his business. My father-in-law, who is a used car salesman, admits the same. Again, that doesn't mean they are bad folks, but in a business that has some bad people. Your industry is no different Dom. The reputation has been earned.

So be a bright light in a dark place Dom. Like a beacon of light, go forth and make honest disciples.

[AndyH]

Ok, I'll come clean. Besides humor there was just a bit of sarcasm. But definitely mostly humor.

But Blinky is being kind; honest disciples don't push 412(i) plans. Maybe as a side show to 1/1,000,000 of the population, ok. That'll make , what, 500 or 600 sorry soles who can't beat 3% long term? Better than the Lottery I suppose. And 3% plus still beats the casinos. So, set up a 412(i) sales shop in a casino and even I'll sell them. Now that's an idea.

But this is the 1960's insurance argument; forced savings. It is a little dated, isn't it? Retro from buy term and invest the rest. All things go in circles, some say.

Again, Blinky is being nice, but the reverse is true. There may be a couple of good apples in a real rotten bunch, not the reverse. And I'm not calling Dom a bad apple. Clearly Dom, you've tried to educate yourself, and hopefully you've tried to educate your customers. I can't judge your intentions, but no way can your industry's behavior in the last few years in particular be justified. It merits ridicule. And anyone who denies that wears the 412(i) mask of post-EGTRRA. I wish I had recorded some of the calls I took on the subject.

One question, though. What are the PS-58 costs using IRS tables for a jumbo 415 level 412(i) with maximim incidental insurance? And I don't mean illegitimate off the shelf; non-marketed premium tables. Real tables. Now that would be informative..

[mwyatt]

Hey Andy:

Looks like things have been hopping during the EA meeting. Good point on the PS58 costs - can't imagine that those are brought up too much on the $5m policy.

BTW, had an interesting conversation w/ one JH this morning about a supposedly "clean" 412i/419 provider. His best analogy was that game you play with your kids at the arcade "Whack a Mole". Now the new spin the former 419Af6 then 412i then "what's the next scam" hustlers are pushing are pure 419 "single premium" plans. His point: if this works now, why were you trying to hide behind the 10-employer screen before?

[AndyH]

Terrific perspective, Mike. That analogy is great.

[Guest DOM]

I don't know where I went wrong with youse guy's,(my Jersey accent surfaces now and then) but I can't find where I am defending anyone who is selling $5,000,000 incidental plans. I've seen $25,000,000, I could be one of the first on record warning several major insurers that they should not be endorsing firms selling plans with springing values and excess death benefits and I gave them all the appropreate cites. Lets not forget actuaries designed those short pay springing plans. and there are a lot more actuaries working for insurance co's than for pension firms, right! I have two that work for me but we all have our cross to bear. My remarks are directed at the attitude that all insurance people are bad, most of whom likely never sold a 412i plan and who are doing a lot more good for society and families than any of us designing tax sheltered 401K plans are doing. To suggest that this attitude is meant in humor and not intended to malign, ridicule and demean is bull. To suggest that a small business owner bases all his financial decisions on a stock market return over the long haul of more than 3% is uninformed to say the least. Sure there are Table 2001 (PS58) cost there are also some losses in the market even in good times, is there a lot of talk about those potential losses when plans are sold? Blinky, thanks for not thinking I'm a "bad apple" frankly I don't care, I know who I am as do >3000 clients. Come on guy's you have to know that you are condescending, don't you? thats OK with me but you have to be prepared to be called on it and not get pontifical when you are. Something else has just come to me, that being there are only 3 or 4 of us banging our gums about something that apparently none of the other readers give a D_ _ _ about, proving who the smart ones are. This is really getting boring. Goodby all...

[Blinky the 3-eyed Fish]

Ithats OK with me but you have to be prepared to be called on it and not get pontifical when you are.

Pot to kettle: "You are black."

[AndyH]

Hey Dom, before you go, how about the names of your two actuaries and also the name of your firm so we can see if you are blowing more hot air?

And how many of your 3000 clients that you "do" are "deemed 401(k) safe harbors" because some of the employees are covered by a DB plan?

http://benefitslink.com/boards/index.php?s...t=0entry70382

[mwyatt]

Hey Dom:

Perhaps there are circumstances where 412(i) plans can be a great fit. Perhaps also you have several of your "aggressive" brethren trying to run a square Mack Truck through a round pinhole in the name of tax savings. Do you really wonder why, given that this is a board frequented by pension actuaries who can visualize the pitfalls put out by the "fun with numbers" crowd, that the 412(i) pie in the sky schemes we are all shown over the years may lead to just a little skepticism here?

Andy's original link was a classic example (someone please explain to me how a cross-tested DB plan could produce such results - I thought cross-testing a DC plan was to skew contributions to look like a DB - can't imagine the reverse would work out so well - you still have the overhanging 415 lump sum limits), although I would say that it isn't out of the line with some of the farfetched numbers we all see. Of course, when the presentation is made (and we point out that if the plan runs to its logical conclusion, and the high-end client wishes to cash out as a lump sum, only to face the reality that at the bare minimum 35-40% best case of his CSV will be donated to the IRS as unrecoverable excess assets - worse if you're funding a subsidized 100% J&S @ 3.5%), the wink is made that the plan will only really run for 5 years. You seem to have been around awhile; remember when TRA '86 came through and you had a ton of folks at the drop of a hat facing severely overfunded plans due to radical drops in the 415 limit? Remember, the sunshine provisions of EGTRRA are still due to expire... Also look to the Senate bill, which has added a 5.5% floor on the 415 LS rate. As a client we added last year said, who when finally presented with the facts of 412(i) v. "old fogey" DB plans, "you know, I can take a million dollars cash out of the bank, have it burn to a crisp, and then get a deduction for the loss, but what I really want to know is where is my remaining $600,000?"

[Guest DOM]

This response could be a duplicate I don't think my first attempt to answer Andy was sucessful.

Andy I will be glad to introduce you to my actuaries in fact I'll have them talk to you as soon as you provide your phone number as I have requested several times. Since you don't have the cuellioni"s to use your real name I don't know how to reach you. We really do have to talk. We shouldn't be boring others on this site with whatever your problem is with me. Be a man!!!

[AndyH]

Gee, Dom, and to think that I was actually looking forward to your response. I figured you could have come up with something a little more clever than the junior high recess retro again.

And of your 3 employees, two of them are actuaries? Boy, you work these people to the bone with all those plans that you do. What's that, 1000 each?

But now that this discussion is off pensions it's closed.

And congrats for earning all five of those badges, BTW. Shall I link that?

I'm out.

[Guest DOM]

Andy, apparently you are smoking something, which would explain your comments, get some help lad. I have 14 employees in two offices and approximately 1000 of my 3000 clients are pension. Just wanted to set the record straight. Why not tell us a little about yourself? you know during those down times between the munchies. I still don't know how to get in touch with you.

[david rigby]

This has been a disappointing discussion thread, not because the topic is unworthy, but because it has degenerated to name calling. Please, let’s return to civility. If the participants want to argue/discuss the particular pros and cons of 412(i) plans, I suggest, and request, doing so with numbers, facts, and logical reasoning. It is also OK if we agree to disagree. Thank you.

[Lame Duck]

It's my personal understanding that a 412(i) plan is best suited to a situation where the client is looking for a no risk investment and the guarantee of an income for life. I do not see it as approriate in a situation where a lump sum distribution is anticipated for the reasons stated in mwyatt's post. There is a strong likelihood of a reversion subject to the reversion penalties where a plan is funded at 3.5% and a lump sum distribution is currently mandated at 5.0%. I also don't see life insurance as a good investment in a retirement plan, unless the individual is uninsurable outside the plan. The primary purpose of life insurance is to provide for protection in the event of death and putting it in the plan turns a tax exempt distribution into one taxable at ordinary income rates. In some instances the distribution may be eligible to be rolled over into an IRA, but it is still ultimately taxable.

I concede that my knowledge of 412(i) plans is limited, but I, like many other posters, would like to learn more about them to know when they would better suit my client than a traditional defined benefit plan. Dom, in a prior post you were asked to provide a scenario that you believed was proper for a 412(i) plan and then the posters would debate the relative merits of 412(i) against a traditional defined benefit plan. I don't believe you ever provided that scenario or, if you did, I missed the discussion. I still would like to see your sceario so that it can be discussed objectively and intelligently.

[Guest flogger]

Thanks for the civility Lame Duck. As an actuary, I have done analysis on many 412i proposals. There have been only few that would actually pass the death benefit incidental rules. All of the ones I've seen compare unfavorably to the traditional DB. The bottom line is that the client can, for less money, provide the same benefit between a combination of traditional DB and life insurance outside the plan. This is even true when looking at the "5 year and out" strategies.

I work in an insurance environment and am very favorable toward certain applications of insurance, esp. funding Non-qualified emerging liabilities. (I'm trying to state that as both an actuary and an insurance producer, I'm unbias.) My vote goes to the traditional DB plan, every time.

[Blinky the 3-eyed Fish]

There is one other time I can think of when a 412(i) has some merit. That time is when the corporation needs a larger deduction for just a few years, but will not need the deduction past that time. The 412(i) can be converted to a traditional DB and the plan kept alive until the years of participation accumulate enough to allow the plan to terminate and lump sums be paid.

I realize this is a relatively uncommon situation. I wouldn't use life insurance products at all for this model, just annuity products.

[Guest DOM]

I appreciate the comments requesting civility and from my end will comply. I apologize if anyone was offended by my hostility toward Andy.

Please go back to some of last years post and see that I did not cast the first stone.

Posting numbers to defend a 412i sale would in my estimation be foolhardy and kind of analogous to asking someone "do you still beat your wife" how do you win that argument? the degree of anamousity by certain people toward these plans would not permit an unbiased result in my opinion, no matter the numbers. Conveying all the variables that would need to be considered would be extremely difficult and I'm not interested in trying. I think Blinky made a valid point in his example and I think I did also in my post of 3/25/04 at 4:11PM. How about a little consideration for cash flows, tax deduction needs, estate planning considerations, business financial planning, family needs, health considerations, special needs children, or the 60 year old who just hates and mistrust the stock market, and where did I ever say that 100% annuity wasn't a good idea? they represent most of my plans. why is it so difficult for some actuaries to understand that all good decisions are not only based on numbers? and the list possibilities go on. As I tried to convey all good decisions are not always number driven and anyone reading this that has personal contact and is on the front line with clients and the decision making process knows this very well. Is there one best PSP/401k, safe harbor or no SH, one best offset design? one universally accepted funding method?

In closing one last point: as a frequent reader of this platform I can't recall instances where opposing numbers were used or requested for critical purposes. I'm not talking about someone trying to make a point by using numbers but specifically being challenged. Again demonstrating the degree of animosity exhibited toward insurance in qualified plans. A friend after reading these postings last week called and suggested that I back off trying to defend using insurance in plans, 412i or otherwise because the bottom line in his opinion with a large percentage of the anti's was the "Green Eyed Monster " for the success of the undeserving "insurance peddler". Could this be?

[AndyH]

Excellent comments, Lame Duck, especially your second paragraph.

Thanks to David Rigby et all for getting this back on the right plane.

To anyone, assume a 412(i) without life insurance. Must it be funded with annuity contracts, and if so, is there any advantage to the purchaser of such product within the DB/412(i) plan?

[mwyatt]

I'll reiterate my EGTRRA sunset provision point, especially if your NRA is tied to the EGTRRA limits, rather than the TRA '86 SSRA limit. A plan of funding for 5 years and hoping to catch up with future years on the 415 10-year participation limit may put your client in an untenable position if things reverse themselves.

Anyone who went through TEFRA and then TRA '86 can remember how long it took to get rid of some of these overfunded plans. A word to the wise (or at least let your client be aware...).

[AndyH]

Good point, Mike.

And I wonder what the surrender charge might be for these things that are funded by annuity contracts and need to be prematurely unwound for the sunset issue or any other business reason.

Can anyone speak with experience on how these contracts might be typically structured with respect to surrender charges if a lump sum is desired?

And admittedly, I've seen mostly old school annuity contracts and there may very well be more modern ones in these products that do not have the surrender charge as such an important consideration. Is that now a non-issue?

[Guest KAR]

Andy - to answer your post a few up. Yes, there are plans that are annuity only. The plans must be funded with life insurance contracts. So you would see annuity and life insurance products in the plan. I am not aware of any other investment products that would be acceptable. Although, I'm sure there's someone looking for the "contract" loophole. Annuity only plans work well for those owners that need the larger benefit with only a few years to retirement. But maybe they don't need the insurance or can't get the insurance due to health or age.

The annuity contracts that I see set up do have the surrender charge. Most are based on a 5 or 6 year schedule. Since 412(i) plans must still meet the same permancy requirement that other plans do, most plans I have dealt with are set up with the intent that they will last for at least 5 years. So in theory, the surrender charge should not play into the distribution.

[Guest Topgun]

It appears there is an unobjective bias toward DB plans as opposed to 412i DB plans. If we analyze the problem DB plans have under section 412 we will come across major underfunding issues when the market goes into a recession and major overfunding issues when the market does well. If we look at even large Db plans like General Motors, they had to come up with 13 Billion to solve there underfunding problem. This would not be the case of a 412i DB plan which is run on annuity contract guarantees and insurance contract guarantees. If General Motors could afford a 412i DB plan it would clearly be a superior plan. If we look at the Life Insurance component, if it becomes a small part of the plan, it adds a death benefit feature that allows the surviving spouse and children income if the breadwinner dies during his or her working years. Finally, if you factor in the actuarial cost and the consulting cost of a traditional plan, the 412i plan can be in many ways less costly than a traditional DB plan. In comparing the 412i DB plans over the last 5 years with the traditional DB, the 412i plan generally has been a superior product. Please discount the abusive plans "all insurance" 5 and out etc. They were never 412i plans to begin with as stated in "dicta" of Justice Greenberg in Neonaotlogy. What can 412i plans do-provide stable guaranteed income for life something the current retirement planning industry does not provide.

[Guest Topgun]

It appears there is an unobjective bias toward DB plans as opposed to 412i DB plans. If we analyze the problem DB plans have under section 412 we will come across major underfunding issues when the market goes into a recession and major overfunding issues when the market does well. If we look at even large Db plans like General Motors, they had to come up with 13 Billion to solve there underfunding problem. This would not be the case of a 412i DB plan which is run on annuity contract guarantees and insurance contract guarantees. If General Motors could afford a 412i DB plan it would clearly be a superior plan. If we look at the Life Insurance component, if it becomes a small part of the plan, it adds a death benefit feature that allows the surviving spouse and children income if the breadwinner dies during his or her working years. Finally, if you factor in the actuarial cost and the consulting cost of a traditional plan, the 412i plan can be in many ways less costly than a traditional DB plan. In comparing the 412i DB plans over the last 5 years with the traditional DB, the 412i plan generally has been a superior product. Please discount the abusive plans "all insurance" 5 and out etc. They were never 412i plans to begin with as stated in "dicta" of Justice Greenberg in Neonaotlogy. What can 412i plans do-provide stable guaranteed income for life something the current retirement planning industry does not provide.

[AndyH]

If General Motors could afford a 412i DB plan it would clearly be a superior plan.

Oh.

[WDIK]

Topgun:

Welcome to the discussion.

Finally, if you factor in the actuarial cost and the consulting cost of a traditional plan, the 412i plan can be in many ways less costly than a traditional DB plan.

Does this also factor in the commission and cost of insurance?

In comparing the 412i DB plans over the last 5 years with the traditional DB, the 412i plan generally has been a superior product.

Is the basis of this statement the fact that the market has been down over the last five years? If so, "past performance is not necessarily indicative of future results."

If there are some other reasons why you feel 412(i) plans are superior, would you please elaborate?

[Blinky the 3-eyed Fish]

If General Motors could afford a 412i DB plan it would clearly be a superior plan.

On what basis? This doesn't make sense to me. I know if I could afford a TVR Speed 12, it would be better than my current car.

Topgun, as for your other points, the stable rate of return of an annuity contract has been shown to pale in comparison to the stock market return over the long haul. Life insurance can be purchased the same in a traditional DB plan the same, so no advantage to 412(i). As WDIK brought up, the cost of a 412(i) plan investments far exceed the actuarial cost of a traditional DB plan.

[Lame Duck]

For what it's worth - my firm entered into negotiations with a major insurance company to provide administrative service to a 412(i) program that we would jointly develop. In those negotiations, it was revealed to us that the commission payable to the agent in the first year of the plan is 90% of the premium. When a 412(i) plan is shown to be the best, who is it really the best for?

[AndyH]

KAR, could you elaborate on the surrender charge issue? Are you saying there is typically no surrender charge for a "lump sum" withdrawal, or are you limiting the discussion to an annuity conversion? I can understand no explicit "charge" or "penalty" for an annuity conversion (it is built in), but would the same be typically available after 6 or so years for a full withdrawal, and if so how would the withdrawal amount be derived? I wouldn't imagine that you'd get a universal life type of statement with opening balance, insurance charges, interest credit, ending balance at any reasonable interest rate after 6 years, or would you?

Topgun, what is your occupation?

[Guest Topgun]

Model #1.

Let us look at one model ..assume a 412i plan has $200,000 in contributions. the same traditional DB plan has $100,000 in contributions. The corporate tax rate is 35%. To keep a comparative analysis the same the investor also has corporate gains of another $100,000.

1.The company adopts a DB plan that earns 10% and has made $10,000 inside the DB plan. The DB plan is worth $110,000.00. Outside the DB plan he also earns 10% and his value is $110,000 in the side account. Unfortunately he must pay corporate tax on the other $110,000 leaving him with $71,500. The total corporate assets are $181,500.

2. Let us assume the 412i is invested in a no load FPDA earning 3%.

The total corporate assets are $206,000.00. the 412i DB assets exceed the DB assets by $18,500.00.

This model does not take into account distribution upon retirement and generally you will reach a cross over point where it is beneficial to change to the DB format. If you used loaded Life insurance products it could have a negative impact on performance. If you use HECV Life products it could have a neutral impact upon performance and allow a death benefit for the survivors.

[Guest Topgun]

Although I agree with Blinky and respect his comments, you can create a split funded DB, your actuarial assumptions make the funding lower for the split funded DB as opposed to a 412i. It has never been proven that investors especially individual investors will outperform a fixed rate of return. If you run Monte Carlo simulations in many cases the investor will run out of funds. This is analygous to the Martindale system used at the Blackjack table.

In a DB plan you are penalized by the IRS for fallling into the "Monte Carlo" by way of "underfunding peanlties". The tables do not penalize you if your hand runs bad you just lose your money. In addition, if you are the employer you need to make up for losses for your employees. IF everyone was making money in the market the PBGC would not be 5.6Billion plus in the hole.

[Guest Topgun]

Thanks you WDIK.

[Guest Topgun]

Andy, I troll the Mega society website-tell Kevin Langdon I said hi. I am on the ICC almost every day.

[AndyH]

You got the wrong (used to think he was good until the last visit to Foxwoods) blackjack player.