TARGET PLANS (this is the closest forum I see)

[Guest Rosemary Raymer]

I have a governmental target plan that is decreasing the interest rate from 5.5% to 5%. I am taking the PV based on 5% pre & Post retirement and subtracting the Theoretical Reserve which was based up to this point on 5.5%. This is producing a higher normal cost than the client was prepared for. Am I missing something?

[Guest Doug Goelz]

If you are using a lower interest rate to calculate the present value of the target benefit, then it makes perfect sense that your normal cost is increasing. (The lower the interest rate, the higher the present value.) Since you increased the present value of the benefits you are funding towards, you need to make additional contributions to get back on pace to adequately fund them.

It's been awhile since I looked at target benefit plans. Also, I am not familiar with all the plans available to government entities. Do you simply have a regular target benefit plan as stipulated in the 401(a)(4) regulations?

If so, are you trying to claim it is a safe harbor type of plan, or are you testing it each year for nondiscrimination (in amount of benefits provided)? I'm just curious because the use of an interest rate lower than 7.5% would prevent you from using the safe harbor approach.

[AndyH]

I second the question, also out of curiosity. I have worked on target plans quite a bit, including recently.

What type of government would have a target benefit plan?

Why would such government decrease the interest rate from 5.50% to 5% withouth knowing the cost impact?

Why 5% (or even 5.50%) when private plan standards are 7.50-8.50%?