Actuary's Responsibilities

[flosfur]

Does an actuary have a (legal/professional) responsibility to minimize or maximize a DB plan's contribution by exploring the effect of different cost methods etc?

That is, can an actuary be held liable because the client did not get higher deduction which could be been attained by use of "permissible" funding method etc?

Or the contribution was not minimized (and could have been), as a result of which there is a funding deficiency and the client had to file Form 5330 and pay the penalty?

If an actuary does have such a responsibility, what if the client does not want to pay for the extra time & effort involved in doing so!?

Has there been a case where an actuary was held responsible for not computing higher permissible / lower required contribution?

[Effen]

Flosfor,

I don't think anyone is going to touch your question on this board. Not that your question isn't valid, in fact, I think it is an excellent question, but many actuaries aren't willing to share these thoughts in a public forum.

I know that most EA Meetings and ASPA Meetings have sessions related to your question, but they are generally not taped. You may want to check the outlines.

The 2nd General Session at the 2002 EA Meeting was taped and dealt with Professionalism. It was a very good session.

Also, you may want to contact whatever actuarial organization you belong to. Most would have someone who could offer you some advise or could at least point you in the right direction.

[ishi]

I'll take a stab ....

I'll leave the tax-deductible issues to the tax professionals.

Regarding minimum funding requirements, the actuary does not have a legal nor professional responsibility to minimize the minimum. The actuary's responsibility is to reasonably fund the future promises, subject to the minimums required by ERISA. To that end, the actuary could get in trouble when minimizing the min, when it is demonstrated that the approach is not reasonable. A good example is a situation where the actuary uses a funding interest rate of 10% to reduce the min, but the trust is all bonds.

Holding an actuary responsible for not minimizing the min would be extremely difficult, since the arguement would hinge on reasonableness. The sponsor's recourse is to engage a more aggressive actuary.

Also, funding deficiencies occur because the sponsor did not contribute the minimum amount. The feds would frown on a sponsor who sets a contribution amount and coerces the actuary to set the minimum accordingly.

Now, with all of this said, there are many instances where short-term funding anomolies are "fixed" by short-term solutions (ex. using a smoothed MVA for AVA), and the overall strategy is still deemed reasonable by the actuary. I also believe it is the actuary's responsibility to explore different possibilities for the sponsor, stressing the pros and cons of each change. You should, however, get approval from the sponsor before racking up the charges.

Hope this helps.

_______________________________________________

Ishi, the last of his tribe

[flosfur]

Effen & Ishi, thanks for your input.

I expected a lot more discussion/opinions but I guess either I must be the only one who has come across this issue Or this issue must be a Taboo!?

[Larry M]

I don't think the subject is "taboo"; rather I believe it is one upon which we can pontificate (my Reader's digest word for today) for a long time or simply state:

the actuary should make sure the client understands there are many ways to fund a d.b. plan. For any plan, you can put more money in the beginning and less later, or less now and more later or anything in between.

Whether a contribution is "maximized" in any one year is subject to a number of parameters. For many funding methods, there is a range whcih produces a minimum and maximum suggested contribution for that year and that specific set of assumptions. If you can, steer the client to one of these methods and suggest making higher contributions in good years to build up a credit balance for the bad years.

On the other hand, if the client wants you to change your best estimate of assumptions and also change funding methods every year in accordance to whether there is money available to fund the plan.....well, you gotcha yourself a problem client who may not belong in a defined benefit plan.