cash balance - interest rate assumption

[Guest Happy Actuary]

Sorry in advance if these seems too elementary - as I haven't dealt too much with cash balance plans. Is the prevailing actuarial practice to change the funding assumption for investment return to match the gatt rate each year, or do most people allow it to remain more steady (as one would for a non CB plan?)

Thanks in advance!

[Guest Harry O]

Using a fixed rate invites the famous "whipsaw" issue (i.e., credited rate higher than applicable 417(e) rate). See IRS Notice 96-8 for some background. Most employers now use the 417(e) rate to avoid any problems (which is a shame for employees since this rate is generally lower than the rate most employers would be willing to give).

[Mike Preston]

Harry, I'm not sure the issues are related. How would the rate used for funding invite whipsaw issues?

[Guest Harry O]

Mike,

You are right. I didn't read the question closely.

[Mike Preston]

Happy, I don't think there is any specific pattern. And there certainly is no direct tie between the GATT rate and the funding assumption.

[Effen]

I think it is fairly common to use the GATT rate as the funding assumption. When the rate changes, some actuaries call this an assumption change and others just let if flow through gain/loss. I think if you state your funding assumption as a specific rate, it would probably be considered an assumption change, but if you state your funding assumption as the gatt rate as of a specific month then you may be able to argue it's just gain/loss.

I've seen it done both ways. I tend to use the gain/loss approach.

P.S. Not to be insulting, but these designs are not as simple as many people think. There are a ton of issues (top heavy, 415 limits, gateways, funding, communication, etc). You really need to have a firm grasp on the issues before you agree to do one. Doing just one will most likely cost you several times your fee quote as you unravel the issues.