Annuity Purchase

[Andy the Actuary]

A DB plan sponsor amended the plan to offer terminated vested participants the right to an immediate lump sum (they already had the right to take a lump sum at early or normal retirement date). There are a few participants who elected not to take an immediate lump sum (can you believe?) and so the Plan has decided tol purchase a deferred annuity in their behalf.

The annuity contract will include the lump sum option. However, the insurer indicated the contract will pay lump sums in accordance with the Plan provisions in effect at time of annuity purchase. So, a lump sum paid at a later date would not, for example, reflect PPA2006. This allows the possibility that two persons (one for whom the annuity was purchased, the other, an active employee who later terminates) could receive lump sums at the same distribution date but calculated on two different actuarial bases.

Can anyone who has had experience with a similar annuity purchase provide any legal basis that the insurance company's treatment relinquishes them from applying an actuarial basis that would otherwise have applied had the annuity not been purchased?

[tuni88]

[First a question: Why wouldn't they want to just carry a few vested terminated employees? Why do they think that is more painful than paying out the nose for a handful of annuities?]

It is surprising that these few didn't grab the money when dangled in front of them. Without knowing something of their individual circumstances we can't judge them, but it does go against what the herd does.

Several years ago at a former employer we had a lady who developed a deadly condition that required her to retire. The docs gave her 3 months. When it came time to elect her payment option she chose single life annuity over lump sum. We had been in pretty regular contact with her and when we got the election forms back we were shocked, and stumped as to what to do. Even though we are not supposed to try to steer people towards particular options, this one was so odd that we had our HR director call her just to be sure she understood both options and knew the ramifications in her case. She very cooly and rationally responded that she undertood everything and wanted to let stand her decision. We didn't press it further and she ended up getting 4 monthly checks. Go figure.