Calculation of MVAR In A Plan That Pays Lump Sums

[Guest merlin]

A db plan pays lump sums calculated on the greater of the plan's actuarial equivalence factors and the 417e interest and mortality. Is this the proper way to calculate most valuable benefit accrual rate:

Acc Ben = 1000 at 12/31/02

AE lump sum = 50,000

417e lump sum = 55,000

AB as subsidized by 417e = 1100

Substitute the 1100 subsidized accrued benefit for the normal accrued in the usual calculation of the mvar.

[AndyH]

No, it is not that simple. Maybe this will help:

http://www.benefitslink.com/boards/index.p...=ST&f=22&t=9479

[Guest merlin]

Sorry, Andy, I'm not getting it. I understand the basic calculation of the mvar vs. the nar,and I agree with the #'s in your link.But it appears that you and Doug agree that the mvar should reflect the 417e lump sum rates (both Carol Sears and Larry Deutsch agreed emphatically at ASPA) and then the post ends. Now that we all agree that the 417e rates should be reflected in the mvar,how do we do it? Increasing the acc'd benefit from 1000 to 1100 was my feeble attempt to recognize the affect of the lump sum rates. Any other thoughts would be appreciated.

[AndyH]

Merlin, yeah, I caught that synergy between the two this year as well. Larry Deutch did a total about face from last year. I was in both sessions this year and last year. Were you?

Back to the question, here is some stuff from Doug's post:

"In your example, this process would be as follows (assuming a 50% joint and survivor benefit):

1. LSV / APR(plan 50%J&S) x APR(testing 50%J&S)

= 13,926.79 / 127.591 x 106.726

= 11,649.34

2. 11,649.34 x 1.085 (accumulated value at 65)

= 12,639.53

3. 12,639.53 / 95.383 (APR using testing LA at 65)

= 132.51 (monthly single life annuity at 65) "

So, assuming that the plan's QJSA is Joint & 50%, and using the above as a guide, I think the process is as follows:

1. Take the actual lump sum, divide that by the APR for an immediate Joint & 50% survivor annuity assuming the spouse is the same age. Then multiply that by the J&50% at the same age using testing assumptions. This I would call a "normalized" lump sum.

2. Bring that forward from AA to TA at the testing interest rate.

3. Then divide that by the life annuity APR at testing age using testing assumptions. Then divide that by testing comp and then by testing service. That is your MVAR.

This assumes of course that the lump sum is the most valuable accrual, which would be true unless there is a subsidized retirement benefit of some sort.

[Guest merlin]

Hi, Andy. After ASPA last week and my son's wedding this week I' back in the office to relax. Thank you for the link. I used your methodology as well as my "Reader's Digest Condensed" version and got the same answer (agreeing with yours) both ways. I tried it at ages 24,44, and 64. Looks good.

No, I didn't make the Conference last year. But Larry's show this year more than made up for it. Vey entertaining and educational at the same time. I liked the "magic number" concept.

Thank you again for your time.

[david rigby]

Anyone want to share the "magic number"?

Heck, we might even be interested in "Larry's show".

[MGB]

As a note of historical reference:

Larry was the first person to show me how to run and check a valuation almost 25 years ago when we were both at TPF&C in LA.

I have seen many "Larry shows", including being on panels with him and we serve on committees together. (I did not attend the ASPA conference, so I don't know anything to contribute about his presentation there.)

[Guest merlin]

The "Magic Number" is the minimum # of NHCEs that must be added to a rate group to get it to pass.

MN = (Midpoint of SHUSH Corridor)*Ratio of NHCEs to HCEs

In Larry's example there were 5 NHCE and 2 HCE.

Conc. ratio=71%, corridor= 41.75%-31.75%,midpoint=36.75%

MN=(.3675)(5/2)=.91875,rounds to 1.

Andy,Larry also made a comment that the MN was independent of something. Did you get it?

[AndyH]

He said that it was independent of the size of the plan. He said that someone, Adrien LaBombarde I think, convinced him of this.

[Guest merlin]

Yes,that's right. I remembered La Bombarde's name,but not what he said. Another senior moment come and gone.