Age Based allocation formula

[Fred Payne]

We just acquired a plan that is age-based. The determination of the Allocation Points requires us to, first, multiply comp by the annuity purchase rate, and then, second, to discount step one by 8.5% from the participant's normal retirement age (age 65). THe result is the Allocation Points.

I have a participant over age 65. Am I correct that her allocation points are simply the product of step one because no discounting is possible? Or does table "Adjustment to Actuarial Factor for Normal Retirement Age Other Than 65" somehow come into play?

Thanks.

[AndyH]

Fred, it is possible that such a plan provides either a lesser contribution to a 66 year old than a 65 year old, a greater contribution, or the same contribution. Your question is plan-specific.

[Fred Payne]

AndyH:

THe only reference in the Plan to this issue is that "a Participant who has reached Normal Retirement Age may elect to remain employed and retire at a later date. Such participatn will continue to participate in the Plan and will continue to receive allocations under Article 3."

Article 3 is the formula I originally referred to.

THe document offers me no guidance on the calculation of the Allocation Points for a participant over NRA.

[Guest merlin]

My recollection is that Corbel's AWPS factors depend on the definition of NRA. If NRA=65, the age 65 factor is used for anyone beyond 65. If NRA=65/5, the factor will be the factor for the specific age. Can you use this reasoning in your situation?

[AndyH]

And I think you'd be hard pressed in an age-based PS plan to justify giving someone older (as a pct of pay) less than someone younger without it being considered discriminatory, so even if you had a plan that had a lower factor for someone past age NRD I'd change it or stretch an interpretation if necessary to prevent that.

And I know this happens in (non-safe harbor) targets and db plans but I still don't like it in an age based PS setting. Just one opinion.

[Fred Payne]

Here's another question about this plan. The refers to the MONTHLY annuity rate based on the UP-84 Table. I thought these factors were annual rates.

Is there such a thing as monthly annuity rate tables?

[AndyH]

yes, but I think it's nothing more than one equals the other times 12, so it makes no difference except maybe in the rounding.

[Blinky the 3-eyed Fish]

No, an annual table is not the same as a monthly table times 12. Don't forget mortality is a factor.

[Mike Preston]

This is always a point of confusion. This is because people frequently use 1/12th the monthly rates as annual rates. Or, conversely, 12 times the annual rate as monthly rates. That is usually not correct. There are some calculations where it is correct to do it that way, but most of the time it isn't.

An example helps make this point clear. Using UP84 and 8.5%, the monthly rate at age 65 is 95.38289. 1/12th of this is 7.94857. The annual rate, however, is 8.40691. The difference is always (11/24) 0.458333 with respect to the annual rate; or if you want to use things multiplied by 12, the difference is always 5.5.

The key is matching up what you are using as a rate against the actual payment being made. For example, you usually multiply a MONTHLY annuity amount by a MONTHLY annuity rate. $1,000/month times 95.38289 would give a present value of $95,382.89. However, if the benefit was $12,000/year, you would multiply $12,000 times 8.40691, which would give you a present value of $100,882.92. It is more expensive to provide an annual annuity because of two factors: 1) the full amount is being paid sooner, thereby reducing the amount of money available to earn interest; 2) the full amount is being paid sooner, thereby increasing the amount paid out assuming death does not take place in the first^H^H^H^H^H last month of the year.

Combining both these factors yields the adjustment indicated above.

OK, with that said, the rates that are used in age based formulas are all over the map. I've seen annual. I've seen monthly. I've even seen monthly divided by 12. The key is making sure that the rest of the equation "makes sense". Each is right if the rest of the equation properly takes into account the payment being considered.

[AndyH]

Excellent explanation.

p.s. I did not mean to imply that a monthly table is merely an annual table divided by or multiplied by 12, just that I often see age weighed PS plans where the unit or factor is merely 12 x or 12/ the unit in another.