mwyatt

Unfortunately do not (only have 2000 and 2001 - victims of ill-timed purge of materials by boss in midst of office move in 2000). Any chance of seeing that?

We are currently terminating an underfunded DB plan; as part of the termination, the Owners have signed Substantial Owner Waivers so that all other participants will be paid in full and the two owners will split remaining assets. Plan is terminating as part of sale of company. Lawyers for new owners are a little concerned about Substantial Owner Waivers. I recall back in time (late 80's-90's maybe) that IRS looked askance at the waivers, although PBGC had no problems with waivers. IRS subsequently went along with PBGC and haven't had any problems or discussions with IRS in quite some time on this issue. Does anyone recall anything specifically issued by the IRS on the waiver issue that would satisfy the concerns of the law firm? I did go through the Super Grey Book and found #21 from the 1994 Book, which posed the question of which benefit to use for 415(e) purposes (and IRS raised no beef as to validity of waiver), but would like if possible some formal cite for validity. Thanks for any help in advance.

Amazing what you can find on the Internet these days... (may have to rethink that Checkpoint subscription renewal next time).

Found this site (through BenefitsLink by the way:) ). Try the following link: http://benefitsattorney.com/cgibin/framed/...?ID=223&id==223 At the top pick the year, then scroll down for 84-45. Might want to bookmark this site for future reference.

Good to hear that balmy weather is present in Minnesota. Perhaps this will show up here in a couple of days in New England! I see your point on Ex. 3, although the exact terminology of your Average Salary definition would be helpful (was reading your 36 mo. to mean High 3 Year, take elapsed over all service if employee present less than 3 years). I still think that your EmpB would use the 170k limit even under Ex. 3 since his service started in 2000, hence use the limit in effect at beginning of period of 170k. Don't see in his case where 1999 limit could apply since never had any service or salary pertaining to that period. If he was hired 12/31/1999, could make case for Ex. 3 interpretation.

Actually, given that you have calendar year plan year, I would have calculated your first example (where salaries clearly in excess of limits) as 6/12 of 160,000 for 1999 and 6/12 of 170,000 for 2000, so average for example 1 would be 165,000/12=13750.00, resulting in AB of 5% 13750.00 x 1 = 687.50. (As an aside, if you granted Service on Plan Year, amount would be double this). I agree with your calc of $708 for the second example. I wouldn't think that your ending Example 3 calc would apply since this person was hired in 2000. Is a little odd that Ees 1 gets lower benefit than Ees 2, but just the nature of a DB plan and how limits were applied by year (note that EGTRRA '01 will initially eliminate some of this as the new $200k limit will apply retroactively to past salaries, unlike prior COLA increases to the $150k limit). Hope this is of help (BTW, how's the weather in MN been this year? By brother and father live west of the Twin Cities and have had few complaints so far.)

What is the plan year of your example? Calendar or non-calendar? Assuming from your question that it is non-calendar (7/1/99-6/30/00 maybe) but need confirmation before responding.

Our CD along with Government Forms (nice that they were both released concurrently this year) came in on Monday. Haven't loaded onto network yet; probably will wait a bit for a service pack or two.

mbozek: I was going on my boss's recollection from last fall's ASPA meeting in the Q&A session with Jim Holland/Dick Wickersham. Not sure if I can find cite (nor am I sure, given past track record of these two, that they can either;) ). I looked through the Gray Book archives from the 2001 EA meeting and couldn't find anything that explicitly addressed the situation, so I'm pretty sure that this was a question posed at the ASPA meeting orally. Take it as you will; probably one of those things that they would react to as immediately wrong (smells like a duck theory...). Was anyone else at that seminar who could confirm/deny? I'm sure we've all seen these proposals sent to us from clients who've been ID'd off of Judy Diamond searches. Anyone's experience pro or con would be greatly appreciated.

Something in the back of my head recalls that this (or a similiar) situation was posed at ASPA conference in the last year or two. Quite negative response by the IRS. Will try to find the cite tonight.

Short answer: No, DB plans are not guilty of what S&B were implying. End of story... and let's end this thread. You obviously don't want to even address my last points or listen to what anyone else on this board has to say. Be happy you have any plan; these aren't god given rights (remember, the cheapest option is for you to be offered NO plan... then you can really have the pleasure of a self-funded DC plan).

Mr. Frank: This is a bulletin board frequented primarily by pension actuaries and those involved in the valuation and analysis of DB plans of all types, private and public, from "one-man" to huge MNC plans. I know that you worked long and hard on your analysis of the "unfairness" of governmental plans, and would rather have seen contributions deposited in a DC plan over the years; that is your right. In fact, if you move to the private sector that is predominately what most folks are facing right now with the move to 401k plans as the sole source of retirement savings. Of course, in addition to deferring salary, you would also have the joy of shoveling 15.3% of your income (half after-tax) into Social Security with an uncertain prediction that benefits will be there in the future/and an extremely low benefit in comparison to payments in. I know it is dramatically lower than the 80% of FAS shown in your example. I also think that you are underestimating the funding in your annuity examples, by confusing group funding (i.e., in a DB plan) from individual funding (an IRA). The key point you should ponder is that a large plan can of course make assumptions of 8% etc. with mortality to determine the amount required to sustain a given annuity. Your recently retired teacher in your example with the 1.3m, however, is on his/her own. There are no chances with these funds (if they decrease dramatically through adverse market performance, incorrect asset allocation, etc., that money is gone). The behavioural patterns of an individual IRA holder trying to preserve principal while maximizing income are not to be ignored; the large plan/insurance company can average these factors out over many lives, active and retired. Ponder what recent "unsophisticated" retirees with lump sums solely providing their retirement are facing right now. Short term rates are extremely low due to Fed actions. However, chasing higher yield with longer maturity dates runs HUGE risks of adverse market adjustments this summer as rates come back up. Is the equity market poised for a rebound or is this a "dead cat bounce?" I know that I would be more than a little nervous committing to anything right now in their position, knowing that any mistakes could seriously jeopardize my retirement. The "sleep at night" benefit of a defined benefit plan isn't to be discounted. If you wish to learn something from these boards, please be a little more flexible. We all can stand to learn from others' experiences. If you would like, please provide your data from your paper to me; an outside opinion might be helpful. Why don't we wind this discussion up? I think that we have seriously drifted from the original premise of the sale of insurance policies via viatication...

Dear Mr. Frank: I understand that you have a serious beef with defined benefit plans and annuity contracts. We all have our differing points of opinion, yours from looking at what your contributions could have gotten in the open market rather than funding your government pension, mine from looking at defined benefit plans and real knowledge of supposedly sophisticated investors' actual results (not what they brag about on the 19th hole). Let us agree to disagree... I can't say that I am particularly happy that you chose to post a private e-mail response to you on the bulletin board.

I re-read your article and appreciate your point that investing the contributions may be a better deal. A couple of points to consider, however: 1) Don't sneeze at the power of a COLA. For rough and ready lump sum comparisons, take your interest rate (say 5.5% - current 30-Year T Bill rate) and only a 2% COLA. How do you value? Your effective i% is 1.055/1.02 - 1, or 3.43%. Now reprice your lump sum. 2) Have to consider behavioral patterns at retirement for many folks. Most retirees go towards fixed income instruments due to (not unfounded) fear of dilution of principal. Look at current CD rates. These folks living off of savings/IRAs in money market and short term bonds have serious income shortfalls right now. 3) As an aside (and not trying to add another hot topic), I'm assuming that your governmental employees are not contributing to Social Security. Ever look at the actual formula which computes your SS benefit? Calculate your Average Indexed Monthly Wage, then take 90% of lesser of AIMW and First Bend Point (say $500), then 32% up to Second Bend Point (say $2500) and 15% thereafter. I'm assuming that your governmental formulas are little less "progressive" than this design. 20 years ago this wouldn't be such a big point. When I did my taxes last month, found SS taxes between myself and employer (which I in effect pay for but don't have to declare as taxes) were well in 5 figures. When you factor the extra oomph from not having to pay SS taxes, this tends to mitigate the contribution requirement for governmental employees. 4) You had $1.3 million representing a $138,000 annual life annuity at age 65. Think this is a little high on the annuity side (plus remember where your hypothetical person would be placing this money - certainly not all in equities). Run the numbers using current mortality tables and interest rates. Good debate so far. Let's see if Dave puts in this in the Newsletter;) .

Dear Mr. Frank: Not trying to go after you or mbozek; the problem is that the general euphoria of 95-00 led many folks who should have known better to stray from the virtues of diversification (much to their chagrin). Believe it or not, two of my worst performers were financial advisors themselves. I've done a few independent studies of some clients' performance over the last ten years (we're not involved at all in investments, only provide actuarial services) and have found a number who have taken a complete "round trip" from 1994 (i.e., value of investments now is about even with cumulative contributions less withdrawals). Although this is going a little off-topic, I get the feeling that it is going to take quite some time for things to get back to normal in our markets. Right now you see Enron being held as the scapegoat for the collective sins of many companies over the last few years with regards to "book cooking". Do I think that we are headed for a depression? No, but equity valuations are still incredibly high on a historic basis. Some suggested reading (don't agree with it all, but worth thinking about): Peter Shiller - Irrational Exuberance John Kenneth Galbraith - The Great Crash and from an old professor of mine, Charles P. Kindleberger - Manias, Panics and Crashes. Hope all of our clients have learned a few lessons going forward with their investment strategies. And remember (from a personal favorite, Huff's "How to Lie with Statistics"), if you're down 50%, that means you have to go up 100% to get back to where you were. And for mbozek, I agree wholeheartedly with your comments on investing in viaticated contracts (really wasn't even thinking about that end of it). Looks to me like this investment is on the same level of the multitude of LPs issued in the 1980's. Another generation of dentists will lose their shirts on yet another kinky investment.

Not to throw gas on the fire, but after the last couple of years of how you say "interesting" market returns (how would you like to be the plan sponsor handing out PS statements showing an 86% loss for the year - for real - hope that the receptionist's husband isn't an NRA member), I thought that most people would be looking a little more fondly on the old defined benefit plan. Mr. Frank, your perspective seems to be rooted in the mentality found prior to the collapse of the NASDAQ in spring of 2000. That old guaranteed base pension, coupled with savings or a 401k plan, looks pretty good right now. Being in the small plan domain, there are many clients out there who thought that they had the Midas touch. Too bad that they are going to have to wait about 10 years for things to come back to normal. The REAL point of the articles in Contingencies (the first of which was written by two authors with a very vested interest in what they espouse) is that the viatication of insurance policies in an unregulated market has some pretty thought provoking consequences. You are dealing with the secondary market sale of insurance policies to unknown folks who have a VERY vested interest in your early demise. If your point is that insurance companies and defined benefit plans want to knock off their annuitants, please direct your Newsreader to ALT.CONSPIRACY.THEORIES. Now if you want to contemplate the unfortunate but real situation outlined in the second article of second/third/fourth parties purchasing insurance policies, please get back to your original point. Of course insurance companies, plans, etc. have to have a deal make sense economically in the end. Do you want to deal with companies that are going to blow themselves up (want to buy some Pets.com stock anyone?).

One slight point on the vesting issue wrt the "freezing" of benefit accruals. Full vesting would be required if plan is fully funded; if plan is underfunded at time of freeze can continue with regular vesting schedule. See this thread for further info on impact of freeze: http://benefitslink.com/boards/index.php?showtopic=5561 My quote from DOL is a few items down.

I think that further in the Viatical article (next article, pages 22-25) the author discounts the "Murder Inc." motivation WRT annuities, in that the only financial benefit is the cessation of periodic payments. By contrast, with a viaticated insurance policy, the purchaser has the motivation of ceasing payment of insurance premiums as well as the collection of the face amount of the insurance policy. Plus the relatively unregulated (and unsavory) nature of persons involved in the viadication industry... However, if you see your plan sponsors offering "Adventure Marathon" trips to the Middle East for recent retirees, you may be on to something.... By nature of an annuity, one side always has some sort of potential gain due to early demise of the annuitant. However, would I suspect an insurance company or a plan sponsor of knocking off their retirees? No, but I probably would be nervous with a life insurance policy sold to an unknown individual. See the next article after S&B for further details..

Before responding, please confirm that 1) The $27,000 nondeductible contribution in 2000, which you (properly) showed on the 2000 Schedule B, is reflected in your FSA credit balance as of 12/31/00, but was not taken as a deduction on the 2000 tax return. 2) Your 2001 minimum contribution amount reflects the FSA credit balance and interest on contributions deposited during 2001, so that if $525,000 was deposited during 2001 (over and above the $27,000 deposited in 2000) the FSA credit balance would be zero. 3) Not sure about your maximum deductible contribution of $541,000; assume this number was calculated with 404 assets which were reduced by the $27,000 not yet deducted. Does the $541,000 reflect a reduction for the $27,000 or was the gross figure $568,000? 4) Combined plan limitations under 404 not the issue here; just trying to determine the deductibility of the DB plan.

My boss just brought back a proposal from a brokerage firm contrasting several different types of profit sharing plans for a potential client, including an "Age Neutral" plan. I presume that this is a class-based profit sharing plan ala New Comp, except that you do your General Testing on contributions, rather than accrual rates. Could I get a confirm on this? (As an aside, I think that the proposal demonstrated the danger of proposal software falling into the wrong hands. Their proposal had the 4 sons of the owner in their own group getting 25% of comp, a second group of NHCEs at 23.5%, and a third group including the owner HCE and remaining NHCEs at 3%. I thought that the 5% threshold should apply - right or wrong if not testing on accruals but benefits? Second off, I have a hard time figuring out how you would pass a General Test with 4 of your 5 HCE rate groups having 0% ratio percentages - since no NHCE had an equal or higher rate.)

Both plans are terminating due to retirement of owner (and sale of assets of company - small plan). 3 participants who are missing are somewhere in Central/South America; chances of location are slim to none. Just trying to find an answer to paying out nominal balances from profit sharing plan; the old reply of setting up account with a bank (with eventual reversion to the state) seems grossly unfair in light of $10/month bank fees (plus practicality of setting up accounts for people who aren't actually signing account establishment documents). What are other people doing in this situation?

We have a client who sponsors a defined benefit plan subject to PBGC coverage and a profit sharing plan. There are three participants common to both plans who have left and are nowhere to be found (presumably out of the country). The DB plan is OK as payment can be made to the PBGC using the Missing Participants program. PS plan is a little more problematic. One idea brought up in a brainstorming session was to deem that their PS balances are deemed to be "rolled over" to the DB plan and then paid to the PBGC. This allows total distribution from the PS plan and presumably allows for these participants to have a better chance to actually see their monies somewhere down the road. Any comments?

Sounds like your situation is similiar to one we just reviewed (small doctor's office with wife "working"). What we discovered was that her deferrals really put the ABT completely out of whack on a forecasting basis, to the extent that her $11,000 deferral was going to cost twice that much in extra contribution to rank and file discretionary PS cbn in order to pass. My recommendation if your client is really keen on idea is to 1) See what discretionary contributions are required in order to pass General Test by stopping at Ratio Percentage Test (i.e., all your HCE rate groups' ratio percentages are 70% or over); 2) Figure out your "optimal" solution assuming no deferral by spouse of doctor; and 3) Figure out what you need to contribute to get your doctor back to desired level assuming spouse does make maximum deferral. From here you can see what economic impact is of her deferral Two opportunity costs involved: Cost of stopping at Ratio Percentage Test (contrast 1 and 2) in either lost contributions for doctor and/or increased costs to NHCE Cost of deferral (contrast 2 and 3) will show how much extra needs to be contributed to NHCE group in order to allow spousal deferral. Now you have real dollars to see if it makes sense for her to defer. Hope this is of help.

We came to the same realization too after thinking the whole thing through (you ever try to pass the ABT with the spouse having an effective triple digit accrual rate?). Fred, you are right about passing the Ratio Percentage Test letting you avoid the ABT. However, I haven't run across (in my limited experience) a CT plan where we had results that stopped at the Ratio Percentage Test (if you're driving this buggy, might as well push the pedal to the floor;) ).

Just saw this morning in RIA Pension & Benefit Weekly: As a result of the suspension of the 30-year bond, Treasury will no longer supply the Federal Reserve Board with an estimate of the 30-year constant maturity yield, which is used by defined benefit plans to figure funding needs and lump-sum distribution amounts, and is published in the H-15 Selected Interest Rates Release. What's the next step here?