How do you convert a cash balance plan lump sum to an annuity commencing before normal retirement age.

[Guest jbruggemanjb]

Let's assume there is no "whipsaw" problem -- that is, the plan's interest crediting rate is the same as the IRC 417(e) rate. Assume this rate is 5%. Assume a front-loaded plan (interest is crediting after employment terminates). Assume the plan participant is age 55 and has a cash balance account of $100,000. How should the single life annuity commencing at age 55 be determined? The lump sum benefit projected to age 65 (normal retirement age) is 1.05^10*$100,000 = $162,889.46. The age 65 annuity is $1155.67 based on 5.0% interest rate and the IRC Section 417(e) mortality table -- that is the expected present value to age 65 of this age 65 annuity of $1155.67 is $162,889.46 (age-65 lump sum).

How is the age 55 single-life annuity determined. Is it the immediate annuity derived from the age-55 $100,000 lump sum, where the expected present value of the age-55 single-life annuity to age 55 equals $100,000. Is it the age-65 single life annuity discounted somehow? If so, how should this discounting be done? Should it determined some other way?

[Effen]

Sorry to say, but "what does the document say?" The Plan document will define how the early retirement benefit is determined.

It could be the actuarial equivalent of the $100,000 account balance (ie:100,000 / immediate annuity factor) or it could be the actuarial equivalent of the age 65 monthly annuity. It may be calculated using a set interest rate and mortality table, it could be determined using plan factors (ie:4% per year reduction), it could have a subsidy or a supplement, bla bla bla.

Only the document knows for sure.

Whatever is says, be careful of the relative value disclosure requirements. If the ER benefit is subsidized, the monthly annuity might be worth more than the LS. If it is not, it will most likely be worth less.