jlf

To Steve; To clarify, "term certain" means in my example, that upon reaching the age of 80.5 the account is depleted. It can be a fixed amount for each of the 10 years if one, for example, buys a 10 year CD with a guaranteed interest rate. ------------------ yes [This message has been edited by jlf (edited 12-11-1999).]

To the CPA: Please permit me to summarize. In order to avoid the 10% penalty on withdrawals prior to age 59.5 one Must use life expectancy factors. The periodic payments must last for at least five years or until reaching age 59.5 which ever is later. For example, if withdrawals begin at age 59 they MUST continue to age 64. If they don't, the 10% penalty tax is applied. From age 59.5 to age 70.5 the IRA owner may make withdrawals in what ever manner he or she chooses. This assumes the five year rule is not in place as described above. Upon reaching age 70.5 the balance,if any, must be distributed over a TERM CERTAIN that does not exceed one's life expectancy. For example, one's life expectancy at age 70.5 is 13 years. Unlike the life expectancy rule for distributions prior to age 59.5 our 70.5 year old is NOT required to use his life expectancy of 13 years as his "term certain." He may use, for example, 10 years as his "term certain." [This message has been edited by jlf (edited 12-10-1999).]

I stand corrected with reference to avoiding the 10% penalty for distributions prior to age 59.5. In these cases the "term certain" must be equal to one's life expectancy. No other "term certain" is permitted. to the CPA: Are you saying that from 59.5 to age 70.5 one MUST use life expectancy tables and only AFTER reaching 70.5 does he have the option of using a period of time that is less than his life expectancy? (Do you agree with my age 60 example?) ------------------ [This message has been edited by jlf (edited 12-09-1999).]

CPA; Checkout Publ. 590. It uses the term "period certain". One's life expectancy or joint life expectancy with another is a "period certain". The term of the payout may be over a "period certain" not exceeding the period of time equal to the single or joint life expectancy that apply to a particular case. For example, if the life expectancy of a 60 year old is 21.67 years he or she may elect 15 years for the "period certain". He or she is NOT compelled to use the period certain equal to the life expectancy of a 60 year old which is 21.67 years. Are you saying that one may use a period of time shorter than his or her life expectancy ONLY upon reaching age 70.5, when minimum required distributions must begin? ------------------ [This message has been edited by jlf (edited 12-09-1999).]

to the CPA: The rule you refer to means that it may not be distributed over a period of time that is greater than life expectancy. The $$ may be distributed over any fixed period and to avoid the 10% penalty the money must be withdrawn over at least 5 years if distribution starts before age 59.5. ------------------

I disagree with the CPA: The account balance may be liquidated over a period of time not shorter than five years. ------------------

Based on my assumptions of 11-12-99 a participant who retired at age 65 after 10 years of service credit financed 64% of his own lifetime pension? You see, an "irrational exhuberance" generated an average annual return of 14.3% over the past ten years. The holdings are split in about a 3:2 ratio of stocks to bonds. Pax, How much of the pension would have been finance by the participant if the holdings were invested in a "highly speculative scheme" like the SP 500? ------------------

Happy post- Thanksgiving to all! The current participant handbook of the Teachers' Pension and Annuity Fund of New Jersey states in part: "Contributions are made by the State on behalf of contributing employees". Hows that for full disclosure? I haven't found an attorney yet. Let's have some names. ------------------

Pax; Your statement of 11-23-99 is a throw back to pre ERISA days. In fact your feelings are a throw back to an era when the employee had no rights at all. A period of American history when the employee served the boss at the boss' personal pleasure. Your statement belongs to an era that became extinct with the "great depression". A legal arrangement that allows the minority investor to dictate to the majority investor the distribution options is morally reprehensible and should be challenged in court. Does anyone care to recommend a lawyer? ------------------

Pax; How can any academic discussion be "bad policy"? I for one feel it is an outrage for only one party to know the contribution ratio. You have put an interesting twist into the discussion. The annuitant should think of his $11,000 employer funded annuity as a "bonus". If this is how you view the employer's legal obligation then why shouldn't the retiree be entitled to all of the settlement options available under Federal law for his portion (300,000)? ------------------

Dear John; In my post of 11-15 I said before I would accept the 300000 I would ascertain the actual investment rate of return for each of the last 35 years. Let's now assume the $300,000 is reality; do you agree with me when I say it is bad public policy to say to an emloyee "you must annuitize your $300,000 ($30,000 a year for life) in order to receive an additional lifetime annuity of $11,000 a year financed with an employer contribution of $110,000? ------------------ [This message has been edited by jlf (edited 12-03-1999).]

Dear Ms Calhoun: Does this Procedure mean that a 403(B)(7) custodial account holder can direct his Custodian to invest directly in publicly traded securities as an alternative to mutual funds? Thanks, Joel L. Frank

There seems to be something fundamentally wrong when only the Plan administrator knows the final ratio. If the retiree does not know the actual (real) amount he has contributed to the required Initial Reserve he can be told that the State contributed a "fictitious" amount and the retiree has no way of proving or disproving it. In this case the annuitant must go to the plan administrator and request the annual investment yield for each of the 35 years. Is it the practice in the industry to keep the ratio from the retiree? Could it be that the Plan Administrator does not want this ratio to be disclosed lest the participants will know of the minority contribution made by the employer when they have always been told that the employer contributes the lion share? Once the true ratio is known the employees may demand a separation of the compulsory annuity savings account that they fund from an employer funded pension and the employer cannot have that! ------------------

Fictitious....that's right! The Plan is obligated to make up the difference between the employee's account balance and the required Initial Reserve, yet this difference is never disclosed. I would like to know why.

The 8.75% rate is the AIR used by the plan's actuary in preparing the annual valuation of the plan's assets and liabilities. Based on this valuation, the actuary certifies the employer's annual contribution needed to keep the plan fully funded. The actual rate of return, will almost all of the time be higher or lower than the AIR. The annuitant must annuitize his own 300,000 balance plus the 110000 that the State contributes. If I could I would rollover the 300,000 even if this meant forfeiting the State's portion. I would, however, first determine the actual rate of return on my compulsory annuity savings account to see how close it comes to financing the entire pension.The real rate of return may very well be closer to 10.5% than 8.75%. Note: the annual employee statement never includes accrued interest. The member's contributions accrue 2% interest if withdrawal takes place after completing 3 years membership. ------------------

MoJo, I have never taken the position that the employer is responsible for providing any benefit.(except those mandated by law) Pax; I made a small correction, please see above. The $300,000 was arrived at as follows: Starting salary of $5500 increasing by $2000 per year compounded at the actuarial AIR of 8.75%. ------------------

To Pax: The NJ Teachers' Pension and Annuity Fund uses the following formula: .0167 X Years of Service X Average of Highest 3 Years Salary. The member's 5% contribution is pre-tax. Assume the following: A member retires at 65 after 35 years of service. His average annual salary for the last three years is $70,000.00. His single life annuity is, therefore, $41,792.00 The Initial Reserve required to guarantee the annuity is $420,000.00 The member's account balance is $300,000.00. The annuitant has, thus, financed 71% of the lifetime pension. I ask you, relative to the teacher's contribution, do you think this is a good benefit? ------------------ [This message has been edited by jlf (edited 11-12-1999).]

Pax, I'm referring to the post of 19:36. Sorry for the confusion. I have to give your Quesion some thought. I'll get back to you, and I trust you won't regret it. jlf.

Who agrees with my post of 11-3? In any event like MoJo recently said we have gotten side tracked. I would like to share the following with you. The multi-billion dollar DB System for the public employees of NJ requires the member to contribute 5% of salary to his/her annuity savings account. If he terminates his membership with less than 3 years of credited service his withdrawal is credited with zero interest. (I leave it to Wessex to add the caps, just joking)

MoJo, Re: your post of 11-4-99. If the surviving spouse elects not to rollover the death benefit is it includible in the spouse's gross income? ------------------

Mojo, When the death benefit comes from plan assets I assume the proceeds is considered qualified money and, therefore, eligible for rollover treatment. Is my assumption correct? (Note my lack of caps. I hope my passion is not waning.) ------------------ [This message has been edited by jlf (edited 11-04-1999).]

Chester: THE DEATH BENEFIT PRIOR TO RETIREMENT COMES FROM LIFE INSURANCE (funded inside or outside of the plan.) The death benefit DOES NOT come from the DEFINED BENEFIT PLAN'S INVESTED ASSETS THAT ARE DEDICATED TO PROVIDE THE DEFINED BENEFIT. YOU KNOW THIS IS EXACTLY THE POINT I AM MAKING!! Chester, have you found the post where I assumed a return OF 20% AS YOU FALSELY ACCUSED ME OF? [This message has been edited by jlf (edited 11-06-1999).]

Dear Chester; I am not misinformed. The 50+ billion dollar DB System of the NJ Division of Pensions purchases its group policy from the Prudential Life Insurance Co. The coverage goes up to 3.5 times annual salary. Some DB plans fund this life insurance benefit internally through the plan. Please take a deep breath and acknowledge the point I am making: THE LIFE INSURANCE BENEFIT IS NEEDED(REGARDLESS OF THE UNDERWRITING VEHICLE) BECAUSE ANY EMPLOYER FUNDING OF THE DEFINED BENEFIT ON BEHALF OF AN EMPLOYEE IS NORMALLY FORFEITED UPON DEATH PRIOR TO RETIREMENT. Now that you are more relaxed, I challenge you to find anywhere in this dialogue where I have assumed an investment return greater than 7-9%. You owe me an apology for winging it!! [This message has been edited by jlf (edited 11-03-1999).]

Mojo- I am attempting to make the following point in my example of 10-20-99: The real rate of return matches the AIR for the 35 years; from age 30-65. You ask: Where is the wealth building component? In the DC plan it is in the funding pattern and in full and immediate vesting/ownership of the annuity contract/account. This contrasts with the DB plan where all employer funding is normally forfeited upon death prior to retirement. The forfeited amount is an actuarial gain or wealth builder for the plan. This is why most DB plans provide group life insurance.(non-contributory and/or contributory) Even with this life insurance component the DC account balance remains greater. Reminder, my example assumes, at all times, the real rate of return equals the AIR. ------------------ [This message has been edited by jlf (edited 11-03-1999).]

Doesn't your DB actuary use an AIR? The AIR is but one of many factors, hopefully realistic, that is used in the actuarial calculation to determine the contribution necessary to keep the DB plan fully funded. A realistic AIR is about 7-9%. I am astounded to hear you say that the AIR is irrelevant! ------------------