lump Sum distributions - switching from the 30 yr treasury to a (higher)corporate bond rate. Could this happen suddenly if passed by Congress? Or faze in?

[Guest Scorpionpenn]

Many near to retirerment (wanting lump sum distributions from their pension plans vs. annuity) are fearful that Congress will suddenly change the rules of the "game" on lump sum conversions by raising the interest rates on which they are calculated (allowing a corporate bond rate)- we have all heard this.

The question is CAN they do so without a faze in period. It's so that many have planned their retirements for many years (finances) around the knowledge of their current understanding of how much they will receive as a lump sum distribution under the present structure when they eventually retire. It seems incredible to think that with one quick vote Congress could hurt so many of those who have done so and have it happen "overnight". If there were a faze in period then at least those who are on the cusp of reaching retirerment might have a chance to decide to leave under the current structure of using the 30 yr. bond.

Does anyone have any idea from a reliable source that an immediate act by Congress could in fact happen on this matter or that there might be some kind of "cut off age" at which any new rules ( using the corporate bond rate) would kick in thus protecting current older employees waiting to get what they have been expecting and planned on for many years? Thx in advance for your response.

[Mike Preston]

Like employees have actually "planned" for the precipitous drop in interest rates which have inflated their lump sum entitlement. Yeah, right. That is so much hooey it isn't even funny. They might have anticipated the significant increase in the lump sum, but having "planned" for it can only be accurate if "planning" is limited to the time period since interest rates have fallen.

Please keep in mind that they are always entitled to **NOT** take the lump sum distribution and take the annuity instead.

Let's remember the reason for these "inflated" lump sum interest rates. Some employers in the 80's were applying interest rates that were greatly inflated for lump sum payments (some amended their plans to provide for interest rates of 12% to 15%, IIRC), so Congress got mad and made employers use interest rates which were "more reasonable". Can't blame Congress for that, it was the right thing to do. They just did it badly, in the sense that they didn't contemplate what the impact would be on employers if the situation reversed itself.

Well, just like I wouldn't have gone along with a client that wanted to use a 15% interest rate to value lump sums back then because it was grossly unfair to the participants, I think using 4.96% to value lump sums today is grossly unfair to the plan sponsors, if the plan sponsors don't wish to provide that level of (subsidized)lump sum.

The lump sum rate should reflect the "average" rate that the participant could expect to earn over his or her lifetime on monies invested when the lump sum is provided. It should not be based on current economic conditions. To do so when interest rates are obnoxiously high, as took place in the 80's, is unfair. To do so when interest rates are seriously depressed, as today, is also unfair.

To answer your question: YES, Congress *CAN*, if they want, increase the interest rate that plan sponsors may use to value lump sums with a quick vote and then a quick stroke of the President's pen. And they should.

But they probably won't.

Remember, Congress did so on 12/7/1994 when GATT was passed, which eliminated the even more ridiculous PBGC rates. Those rates are 3.5% today. Would you have said the same thing in 1994 as you are saying today? At that time, the immediate rate was 6.25%, but it provided for a phased-in rate as low as 4.00% for some years (years more than 15 before retirement age). At that time, the GATT interest rate was hovering around 8%, so with a quick stroke of the pen a plan sponsor could lower lump sum rates by about 15% for those at retirement age and much more for those more than 15 years from retirement age.

I don't remember there being a large hue and cry back then, and that was during a time period when employers were, by and large, better off than they are today.

I'll climb off of my soapbox now.

[mbozek]

The current low interest rates that have lead to exaggerated lump sum values are the result of the short term roiling of the financial markets. The increase in demand for risk free investments in the last 3 years and the end of the issue of 30 yr bonds have driven the yields on 30 year bonds down to ridiculous levels that were not though possible when the calculation of interest rates was revised in 1994. (DB plans are large purchasers of such securites). Allowing participants to take lump sums in such exaggerated amounts depletes plan assets needed to fund future benefits which requires larger contributions by plan sponsors who do not have surplus capital. GM recently issued $10B in long term bonds and contributed the proceeds to its underfunded pension plans. (By the way GMs unfunded penion plan liabilites exceed its stockholders equity.) The combination of final average retirement plans and retiree health costs will be the end of the American industrial corporations because the increasing costs cannot be passed on to customers. Almost every us steel co has gone through bankruptcy to shed those liabliites (Bethelhem Steel stopped its pension plan and retiree health benefits for 95,000 persons in March.) Eventually the airline, auto and telecom industries will have to reduce or eliminate pension and retiree health benefits either voluntarily or though bankruptcy. Congress can change the interest rates for lumps sums at any time and even retroactively.

[Guest Scorpionpenn]

Please Read.

Both of you are right in what you are saying and I thank you for your responses. A fopar of a sort on my part. Yes I should have rather stated that many of my peers (who trust and seek my judgement re pension issues) have been counting on the current lower interest 30 year bond rates we have been experiencing and certainly want to recieve higher Lump sums thereby. They certainly could not have been planning ***all of there lives*** for these lower rates. Many are fearful though of taking annuities for as one if you pointed out, many companies are going bankrupt and folks don't want to loose out. We all know the PBGC is in debt and so is the Country. I for one would hate to be an annuitant and get that letter from the PBGC stating that henceforth my hard earned retirement is effectively being reduced as many have had happen!!! Your replys lead this "tinker" to make a comment better suited for a different forum I know. I apologize in advance for, to use your term Mike, "being on a soap box"!!

NAFTA and the WTO have hurt this country almost beyond repair. Both of these "WELFARE WORK on the back of the american economy FOR OTHER COUNTRY PROGRAMS" instituted by Congress along with their unofficial qoutas for hiring "unqualified employees" here has put a drag on corporate America. I see daily this current generations idea of work ethic and I say it does not bode well for all of us. Why is there a problem with this generation? They are being brought up with the ideology that the Government will take care of them if things get real bad. Sad. The education system too is in shambles thanks to our current leaders. Drugs are rampant in our schools and authorities don't know how to deal with it. Parents can't parent as they should because there too busy working just trying to pay the rent (2 and 3 jobs per household). Christianity is taken out of the schools as political correctness prevails. Sad. We are a country that has lost it's way. Europeon philosiphy has been replaced by third world ideals- which if unchecked- will almost surely bring about a new "hybrid of communist intrusions".

Anyway, the USA can no longer compete with China, India and other countries who provide what amounts to slave labor. Outsourcing is rampant. My company is considering outsourcing many of it's heretofore in house functions who pay very low wages to their employees. Unions are loosing ground. (The last bastion of decent paying jobs for the high school educated).

Whats the point of these remarks? Do away with NAFTA and the WTO and let the American market fend for itself. Stop illegal imigration. The illegals steal good jobs from the work force. Oh yeah we all would have to pay a little more for certain services and goods but maybe we wouldn't be in the state we currently are in. Look at California! lOOK AT WHAT THE DEREGULATION OF THE ELECTRIC INDUSTRY ALONE HAS GIVEN US!! Enron!

( A little ranting I know but please forbear).

The 30 year bond is certainly very low. I can't blame those approaching retirement for being a little concerned hoping that Congress won't "rain in on them" for they are those who have, for the last thirty or forty years, helped this country become what it once was (many have fought in wars and or have lost loved one's to the wars) since it is they who see what the good old USA is slowly certainly becoming.

Perhaps though many out there don't realize that on the wages being offered today many need 3 or four incomes in a household to satisfactorily make ends meet. Is this the USA we want? Two and three familys living in one household?

No reply is necessary and no reply will do anyway. No one who was ever poor can help any one else and I certainly hope that America's Corporations succeed and get through the current mess. But it was Congress who TRULY put them there.

As far as for me I'll have no problem if the interest rate for Lump sum conversions is 1% when I retire because I served my country well and so also my father, uncle and grandfather - who fought in BOTH World Wars 1&2. They certainly would want me to make sure I "get mine". Now read the next paragraph .

One last mention. The CEO of my Company's salary has gone from 500K in 1993 to 4 million dollars in 2002. Our Pension fund is about 10 million short of where it should be (interesting). He won't be sacrificing any of his pay though to see to it that we all receive our pensions will he? You bet your life he won't - so who are you kidding Mike. Congress does their part - but greed at the highest levels of many a Corporation is outdoing even the wildest of excessive imaginations of those who simply wish to retire with dignity (the retirement Lump sums I'm talking about even with the current low 30 yr bond are about 300K - less than 1/10th of one years salary for my CEO). Haven't you watched the news lately (Kozlowski!!) And you mentioned "fairness" to the Corporations!! Hah! What about all the people who have gotten screwed in their pensions because of all of the idiacy of bad policies and greed on the part of Executive Boards and CEO's and all the like! Do you recall what happened to Montana Electric - Touch America Holdings!! Anyway... I could go on and on but... why waste any more time.

Annuities - only a fool would take one today if they have a Lump Sum option.

No apology for my "fopar".

More of us should stand on a soap box. But stand on the right one.

I am sorry Mike. I know you are a professional. I know you try to help others and I am grateful for BenefitsLink. Remember this though. There is so much "GREED" being seen in the media these days by so many it sometimes filters into those of us who try real hard to keep things in their proper perspectives. And for those who try to help, like yourself, a professional answer is sometimes a hard swallow if you know what I mean.

Thx for your time. Scorpionpenn.

[Mike Preston]

Ah, yes. Another vote for choas theory. I'm sorry, but two (or more) wrongs do not make a right. The fact that CEO's may be overpaid, even if true in some circumstances (which I don't doubt), does not justify the pillaging of defined benefit plans. Like it or not, the typical liability with respect to the current lump sum subsidy of a medium sized corporation's pension plan will make a CEO's "windfall" look like chump change in all but the most egregious cases.

It still sounds like pure and complete rationalization to justify accepting "yours" without recognizing that getting "yours" will do far more damage than good.

Congress does have the right to mitigate against the carnage, and should do so. But those who like to arm wave about other factors justifying their entitlement, as you have done, are likely to carry the day because this is more a policital decision than a logical one. Pity, that. I hope the country's economy can survive the hit.

[Guest Scorpionpenn]

I think it's really to late to worry about whether or not our economy will survive the hit it's going to take, not due to retirees getting on average an extra 40-60k or so due to lower interest rates - spread out of the current short period of time that they will remain so low (and by the way a reasonable faze in of the corporate bond rates I'm for), but do to a far to liberal Congress who, as you say, puts politics (and I'll add pork barrell programs) before good financial sense.

Are you from a big city? I am and I work outdoors in one every day. I can tell you that the real drag on our economy is Welfare, Medicaid, and Section 8 entitlements and... well all else that goes with it ( the continuing cycle of new generations getting in on the free ride - all one has to do is have a child with no means of support and BINGO the flood gates open for them!!). These are the constituients that Congess can't get around "helping". Not to mention they also make an almost open invitation -allowing far to many who are not self sufficient entrance into this country. We need to make changes fast (if it's not already to late and I think it is). The melting pot is full and were broke! Just wait till the rich (here and abroad) begin to believe that we are unable to pay our debts and decide to dump our Treasury's. The "buck" will break and chaos will kick in ( then it won't matter if one got a little more out of their Lump sum). We all pray we won't see that day. I sure hope though, while we're waiting for the doom, that there are not all lot of folks who believe that employees of mid size and large Corporations are "a threat" to our economy simply because they want to get a little more bang for their buck out of Lump Sum distributions. So much else is broken. The country has always grown on debt (which really amounts to a huge "ponzie scheme"). When will the "pyramid" collapse? That's anyone's guess. (My guess is within 20 years - not a long time).

I wish you luck Mike. I also wish those who have fought the good fight and worked hard ( and paid mega TAXES all these years) for their families a little better end life by getting a little more right now. Never ever forget the taxes they have all paid - I paid over $35,000 (not counting Social Security!!) last year alone helping to support others - through our Goverment. That's why I believe, as you also summize, that Congress won't act to change the current 30 year bond as the factor for Lump Sum distributrions. Perhaps they'll find other ways of saving this nation. One thing is for sure - a lot of other nations want what we have - America - and if we don't watch out they will get it.

Last response.

[Mike Preston]

Whatever. This is a benefits discussion board, so I tend to limit the discussion to issues that are directly related to benefits and the impact that changes in the benefits system have on other things such as employee relations and the economy.

I'm sorry, but it still sounds like your comments are nothing more than sour grapes. You feel that since there are a great number of people who are receiving more than they are entitled to in your opinion, then it is perfectly justified for your constituents (current reitrees eligible for a lump sum) to also feed at the trough. I don't agree. Especiallly when there is a huge disconnect. The first group is feeding at the government's expense, the second group is being forced on private employers. Big difference.

[mwyatt]

Do you want to talk about the 30-year rate or do you want to rant? Obviously, anyone getting a lump sum right now is catching the crest of the wave, especially given that the computation is tied to a rate artificially depressed at least 150 basis points lower than if the index was tied to an actively issued security.

An interesting comment here:

"Why is there a problem with this generation? They are being brought up with the ideology that the Government will take care of them if things get real bad."

I suppose that you haven't seen the surveys about the long-term health of Social Security and the polls among younger workers about SS being around 20 years from now to take care of them. Confidence level, about 0%. I'd actually bet that most of the younger generation, after the move to 401(k)/DC plans (hey what a great deal, I get to lower my salary to get a benefit), has a decidely less naive notion than you're portraying with that shot. Let's see, you probably had to pay nondeductible FICA taxes with a Taxable Wage Base hovering between 1-2 times of National Average Earnings. Quite a kick in the pants now for us "middle class" workers who are probably coming to the realization that they are paying a ton of money that they not only won't see a return on (and that they also have to pay taxes on both fed and state), but also whatever they receive will be taxed YET AGAIN when or if they do get it!

I do understand your plight (and your agnst, believe me I do). However, does the phrase "rats deserting a sinking ship" mean anything? If you continue to let people strip pension funds of excess payouts via lump sums due to artifically low interest rates, what about the poor saps still in the plan counting on those funds in the future?

BTW the popular press isn't doing anyone any favors with their portrayal of the issue (I know, I've been in correspondence with the Boston Globe). Their understanding of economic issues is about par with the National Enquirer. Remember, the trustees of these plans not only have an obligation to current retirees, they also have an obligation to those remaining in the plan after your windfall. Or would you prefer that your company be forced to terminate your plan at about the worst time possible given current market conditions (in which case all of your bad dreams WILL come true).

[Guest Scorpionpenn]

Hey, sorry if I bruised you but it's a great time to RANT.

First off the 30 year bond is not "artificially depressed". It's where it is due to the fact that the stock market trashed - due to a group of terrorist who timed their carnage perfectly when we were headed for a downturn anyway.

Secondly I'm sorry, very sorry really, that your generation won't recieve any Social Security payments (nor a defined benefits plan)- that's not my fault or any one elses from my generation. Look, I'm sure Roosevelt too knew one day the system (SS) would fail unless major changes were implimented but listen...If we were not paying for all the drug addicts (on SSI) who voluntarily decided that they were going to go get a check for their troubles and leach off of society (!!) Social Security might in fact survive. The Congress again (Ta da!!) did this too!! They're the ones who decided to pay them!! Not to mention all the folks who "learned" how to get on (those without true need) the greatest of "doles" (SSI). Another example of the "mess" we are in. Wake up to what has happened to this Nation.

Tell me why we tolerate Drug pushing countries? We should simply annialate them should we not? They are the real threat to our nation and yet our leaders wouldn't think of a preemtive strike against them would they?? ASK YORSELF THIS. Who's going to win - us?? We could but we won't and why? 'Cause we don't have the guts to face the drug countries or win the the war against terrorism either. Just WAIT TILL THE NEXT STRIKE AGAINST OUR NATION. It will ruin us economically if the terrorist pull it off right and many in this country know what will bring us to our knees - and we shouldn't (and I won't say it here) give them any hints (as if to think that they don't know, I know, but I still won't say it).

Look pal (Wyatt), I was simply making a point after I got Mike's first reply. A point that anyone with good sense would surely think of but might be to "reserved" to put in print.

As far as the remarks about the current generation I'll stand by what I said and it's my opinion - that's all - from what I have seen in reference to their work habits based on work ethic and education ( and our liberal education system caused the problems - victimized by political correctness). Hey, look at NASA for example - we lost two "ships" because all the "old pros" are gone and I'm not making this up - it's a fact. A fact that those in high Governmental positions would be pollitically incorrect to mention so they won't!!!! You can't really blame anyone and I don't for whats happening because any generation should never be as so high minded to think that they could never be at fault, at least in part, for the next generation or for that matter circumstances (problems) that arise out of peacetime life styles.

I feel sorry for my kids and what they are coming into. The best I can do to help them is to be as well off as I can so I can still feed and house them when the real carnage begins. I suggest you read two books - if you can find them -both by James Dale Davidson and Lord William Rees Moag ( not sure of the spelling on " Moag" ) the Titles are " Blood in the Streets and The Day of Reckoning".

We are headed for what Rome faced and it will happen and none of us will stop it because we cannot throw nuclear bombs on Columbia, the whole Middle East, and North Korea. Neither will we protect our borders. We are no longer a "melting pot" - - we have become a "garbage pale" for all of the undesirables of many other countries. Yes, I know the first waves of immigrants also had problems but they were much more self sufficient than we are - living quite simple lifestyles in quite different times. One cannot compare "oranges to apples".

Good luck. And if you too, Wyaat, are one of Benefits Link's founders please know that I appreciate your (?) web site.

PS - I don't mind ranting. If it bothers you let me know and I'll stay away from the site! No, don't bother I won't reply again unless you do.

[WDIK]

I particularly appreciate Mike Preston's comments on the topic of the interest rates used to value lump sum distributions. He stated:

Well, just like I wouldn't have gone along with a client that wanted to use a 15% interest rate to value lump sums back then because it was grossly unfair to the participants, I think using 4.96% to value lump sums today is grossly unfair to the plan sponsors, if the plan sponsors don't wish to provide that level of (subsidized)lump sum.

I have never quite fully comprehended the logic behind requiring a plan to use "reasonable" interest rates (defined between 7.50% to 8.50%) for the definition of actuarial equivalence, while for purposes of lump sum distributions another interest rate is required.

[Blinky the 3-eyed Fish]

Actuarial equivalents don't have to be between 7.5% and 8.5%.

Scorpionpenn, give it a rest already. Sit quietly and wait for the "carnage".

[WDIK]

Perhaps my terminology is incorrect or inadequate, but I do know that under standardized prototype documents, the 7.5% to 8.5% interest rate must be used for certain purposes.

[mwyatt]

The standardized rates come from the final 401(a)(4) regs issued in the early 90's. At that point in time, those were "comparable" rates to the PBGC immediate rate in the late 80s (remember the knee jerk "anything lower than 8%" dragnet with the Small Plan Audit). Always wondered when they were going to get around to amending those rates (of course this would cause some interesting problems for all the cross-tested plans out there).

ScorpionPenn:

The whole purpose of the minimum lump sum amount under IRC 417, as Mike Preston alluded to, was to approximate the cost of what the prevailing annuity contract would be based on the time of distribution and the amount of benefit that could have been received in annuity form. The original PBGC rate structure was badly in need of fix; hence the introduction of the 30-year treasury rate as the replacement back in 1994. What happened since then?

Issuance of the bond was scaled back under the Clinton administration in favor of shorter-term bonds;

Bond was discontinued outright in 2001.

Ever heard of the scarcity factor? What was originally thought to be a rough and ready benchmark for what insurance companies were charging in their contracts had been skewed due to scarcity, and further skewed (as you mentioned) in flight to safety plunges (LTCM in 1998, WTC, etc.) My brother-in-law was a trader in the 30-year pit in Chicago for 15 years; the 150 basis points is widely recognized as the depression in yield due to the scarcity factor, never mind any short-term flights to safety.

So yes, Congress will, and has to, find another benchmark, as the index is not doing what it was intended to do (and it was NOT intended to provide a windfall for those electing lump sum distributions).

And no, you didn't bruise me. It does seem you're bringing alot of outside baggage into an area that doesn't deserve it; I don't quite see the connection between modifying the 30-year rate as a pension index and wiping out the "drug countries" (oops, what happened to Marin County?) or the sinister aspects of NAFTA, GATT, or the Trilateral Commission.