Help Interpreting LR Increase

[mwyatt]

Taking over a plan which specified that Actuarial Equivalence for all purposes would equal 94GAR mortality and the "applicable interest rate" (ie, 30-year UST). The interest rate is based on the 3 month preceding with a 1 month stability period. Both participants in the plan attained NRA @ 1/1/2005 and benefit accruals were previously frozen, so late retirement increases on actuarial equivalence are the only factor.

My problem: how would you determine the Late Retirement adjustment factors, from NRA to NRA+1, given that the document states that the interest rate changes monthly? Any ideas as to a reasonable interpretation (and no, 415 limits don't come into play at this point).

[Blinky the 3-eyed Fish]

You would just use the interest rate in effect at the time of determination just like if a person was pre-NRA you would do the same thing. What were you thinking you might do?

[mwyatt]

Maybe I was just thinking too hard on this, but...

I have an interest rate that is in effect for January 2005. I also have differing rates for each month during calendar year 2005, due to the fact that the stability period specified in the document is only for one month. So in essence I have 12 rates that applied during calendar year 2005. So which one (or all) would you pick to bring the benefit up actuarially from 1/1/05 to 1/1/06?

[Blinky the 3-eyed Fish]

Barring language in the document to the contrary you would use the rate in effect on 1/1/06. It would have to be some bizarre language to come to a different conclusion.

[mwyatt]

What if I'm trying to bring up the benefit to 7/1/05? I've got 6 rates in effect between Jan and July of '05 - this is the reason I've never put in such a short stability period, especially for annuity forms. Would you just use the rate in effect for Jan 05, ignoring the changes in rates in the succeeding months (I really can't contemplate having to do month by month increases based on the varying rates, but this is kind of the logic that I'm seeing by having the IR change monthly for all forms of benefit).

[AndyH]

How dare you take over one of my brilliantly conceived plans!

Bizarre. How would you compute a 415 limit (I know you said you did not have to)?

Seems to me you go either val date to val date or use a different rate each month, i.e. acc ben x 1.0473^(1/12) x 1.0455^(1/12), etc. I guess that is what I'd be inclined to do. Where'd the cat drag this one in from?

[Blinky the 3-eyed Fish]

I would say if you are computing a 7/1/05 amount, you use the rate in effect on 7/1/05. To do anything different would have to contradict your document. That document defines AE, which is a certain rate in effect at a certain time. What it most likely doesn't reference is the rate in effect a month ago. Why do we feel the need to grandfather a rate whose time has come and gone? Fluctuating interest rates are common when they are tied to the 417(e) rate, only the typical change happens annually. Would you grandfather those past rates? Just because it's a monthly change does not call for a change in the methodology of the calculation.

[mwyatt]

Hey Blink:

Let's look at another way then. Now we're at 1/1/2007 with presumably yet another rate. Would you redo the increase from 2005-2006 LR increase using the 2007 rate, or just reflect the 2007 rate going from 2006 to 2007? I see what you're saying, but I'm getting hung up with the month stability period.

[Blinky the 3-eyed Fish]

It would depend on the document. The step rate approach is most prevalent (and some would say required), i.e. where each year's EOY benefit is the greater of the plan benefit or the prior year's benefit actuarially increased. In that case, I would not redo the increase because you already have set your prior year's benefit.

However, I have seen documents that compare the plan benefit to the NRA benefit actuarially increased to the current date, i.e. not a year-by-year approach. In that case, I would use the current rate for the increase.

I can see why there is the hang-up, but my point is you have to follow the document and is there something that warrants a month-by-month increase? I would think not.

[david rigby]

I don't disagree with Blinky's suggestion to use only the rate in effect at the end point, but alternatives may be reasonable. In this case, determining the 7/1/05 AE value by using 6 monthly rates might be a reasonable interpretation, but not a practical one. This may be an opportunity to develop a new administrative practice (and put it in writing).

[mwyatt]

I totally agree with the non-practical basis. My problem is that by having a unique interest rate for a specific month (given 30-year rate and a stability period of one month), by what standard could you use a future interest rate retroactively?

[AndyH]

Mike, I gotta believe that was a drafting error. Call it a scriveners error, perhaps. Nobody would do that intentionally. I think the answer lies behind whatever the intent was, if there was one. Identifying the drafter is half the solution, IMHO.

[Blinky the 3-eyed Fish]

You aren't using a future interest rate retroactively. You are using the current rate. Consider if the AE had been amended. You would be forced to grandfather the accrual because of 411(d)(6) but otherwise would use the current rate. I see that as the only difference

I have too seen documents with a stability period of one month on plans we've taken over. Never on AE though, just 417(e). We amend them but suffer through the transitional period.