Plan Funding

[Gary]

I'm an actuary at a firm that provides tpa services for small pension plans.

We have clients come in to get their tax work done after the fiscal year is complete in many cases.

They come in and say they had a bad year and can' afford to contribute to their pension.

Based on PPA there iss't much we can do for the j ust completed plan year due to the unit credit cost method. Sure I can freeze their plan immediately, but for the just ended year it doesn't necessarily help.

If the plan were frozen at the beginning of the just completed year it would have helped some, but that can't be done.

So if I report a plan minimum required contribution of say 50k in such a situation, the client isn't happy and my employer isn't happy as we may lose a disgruntled client who might go elsewhere to get the answer he wants. So in conclusion from the client and my employer's point of view I'm the bad guy.

Any suggestions?

[FAPInJax]

There are a couple of things I have heard of:

1 Amend the plan to have the EOY accrued benefit earned at the BOY. This throws everything into the funding target and no target normal cost.

2 Use 'smoothed' assets (averaged, whatever the correct term is). This produces a slightly higher value for funding (usually 10%).

3 Full yield curve reduces the numbers even further.

Welcome to PPA as many clients are finding that because the underlying method is unit credit that modifying the contribution (especially downward is no longer possible or difficult).

[Andy the Actuary]

Will any of the recent relief help? WRERA changed thresholds and asset averaging. The recent announcement will allowing changing interest rate sets. Finally, employers still have up to 8 1/2 months after the close of the Plan year to make contributions even though only that part of the contribution made before the tax deadline would be deducted for the Plan Year.

When discussing small professional plans, I would always urge that the purpose of the plan was to accumulate lots and bump up against the statutory limits to justify my fees, legal fees, and their time. Clients were advised not to undertake the DB unless they felt positioned to make substantial contributions for the long-term. The purpose was not to afford the opportunity to contribute 50K when the DC threshold was 30K and the client had had a good year. When the clients kept ignoring what I had to say, I got out of the business.

You are only the bad guy if you didn't disclose all that could reasonably be anticipated to go south when you installed the plan. You certainly couldn't anticipate new pension law but did you ask, "Will you be able to make a contribution if you have a bad business year and explain that the plan offered limited flexibility?" If you has similar discussions, you're not the bad guy and you may do well to have the client go next door before your invoice moves further to the end of his priority list.

End of Sermon

[david rigby]

... and discuss with them the possibility of deciding next November (not December or January) if the plan you just froze should be unfrozen.

[carrots]

Is there any chance that, as of 1/1/2008, you could justify an actuarial assumption that no benefits will accrue during 2008? For example, could you assume that the client will have a bad year and that no one will earn a year of credited service? That would result in a $0 TNC.

[Gary]

Thank you. Some helpful suggestions.

The owner here implements/sells the plans and may not (or I should say does not) always tell them that you have to fund these plans regardless of profits, hence part of the issue.

[Belgarath]

Wow, that makes it hard. We always require a sign-off from the client on an information/disclosure regarding required funding for a DB plan before we ever install it. Perhaps you could gently suggest this to your boss?

Is your boss selling product so there is commission income? This sometimes produces a, shall we say, "tension" between good disclosure and dollar signs shining in the eyes.

[Guest Sus95]

For 2008 I believe you can postfund to an assumed retirement age, say 69 or so, which will decrease the FT and TNC. However, I believe automatic approval is valid for this change in assumption if done for the 2008 plan year, but may require IRS approval if changed in 2009 since it decreases the FT.

[SoCalActuary]

A few tpa firms sent mass mailings to their DB clients with a proposed freeze amendment for 2008 accruals. The motivation was to protect them against the coming recession. If the client could not afford the new accruals, they would sign and return the amendments, along with distributing the 204(h) notices.

Similarly, when PPA was proposed in 2005, some actuaries suggested a "profit-sharing" approach to benefit accruals.

The idea would be that the plan provides some extremely low minimum formula, with a retroactive amendment at the end of the plan year or within 2.5 months after, increasing the formula with an ad-hoc one year increase that matched their ability to fund. Further, this approach works best for plans with a beginning of year valuation technique.

You lose the ability to apply the cushion amount in the deductions for the HCE's who get the increase, but it avoided much of the stress of the plan sponsor confronted with a choice between $9,000 waiver filing application or substantial excise tax.

Another option was used by some firms, where a low AFTAP rate was the justification for a hard freeze amendment, not just a temporary 436 freeze.

[YankeeFan]

For 2008 I believe you can postfund to an assumed retirement age, say 69 or so, which will decrease the FT and TNC. However, I believe automatic approval is valid for this change in assumption if done for the 2008 plan year, but may require IRS approval if changed in 2009 since it decreases the FT.

Is the above approach valid under PPA? For example, the plan's normal retirement age as defined in the document is age 65 with 5 years of participation. Can you change the normal retirement date for funding purposes to age 69 without actuarially increasing the BOY and EOY accrued benefits that are payable at age 65? Lets assume that we're dealing with a one participant plan where the sole participant is the owner-employee.

[Guest Deflector]

I have been increasing the BOY and EOY Accrued Benefits. Sometimes this can help lower your liabilities anyway. For example if you had 4 years to retirement you would be using the 1st segment rate. If you now post-fund and make it 6 years to retirement you would be using the 2nd segment rate. If the 2nd segment rate is significantly higher than the 1st, the discount could be larger enough to help lower your MRC despite the actuarially increase in the AB.

[YankeeFan]

I have been increasing the BOY and EOY Accrued Benefits. Sometimes this can help lower your liabilities anyway. For example if you had 4 years to retirement you would be using the 1st segment rate. If you now post-fund and make it 6 years to retirement you would be using the 2nd segment rate. If the 2nd segment rate is significantly higher than the 1st, the discount could be larger enough to help lower your MRC despite the actuarially increase in the AB.

Thanks for your response. Has anyone increased the normal retirement date and not actuarially increased the BOY and EOY accrued benefits? Is there any justification to do it that way?

[mwyatt]

When we go with an extended retirement age (usually targeting the owner only) assumption, go through all the iterations by age to get the actuarial equivalent at the deferred retirement age. Hopefully noone here would go with funding the NRA benefit w/o increase at the XRA.

Sadly, think that these deferred retirement age assumptions are all too justified given the new paradigm of WTYD (work til you drop) after investment returns for 2008.

[FAPInJax]

Note the last response from mwyatt that the 'normal retirement date' is not modified. There is an assumption that the participant continues to work for a period of time following that date (a judicious use of a benefit suspension notice - especially to the owner - would remove the actuarial equivalent increase at least until 70 1/2). This generally produces lower funding numbers.

[WDIK]

myatt:

Do you know the best way to reach my ergomaniacal brother WTYD? It's been years since we've seen him at any of our family gatherings. His wife tells us he's at the office, but I only get voicemail.

[mwyatt]

Think the suspension (assuming high pay) could potentially kick in around 68 with the new interpretation on High 3 comp. If a lower paid owner, and the actuarially increased benefit runs into the 100% High 3 comp limit, may have an argument. But to blanket state that you'll value the NRA benefit w/o increase to the XRA is a stretch. Best to justify the assumption (of course you're recognizing the obvious in that the participant/sponsor won't be running to the DOL over an unfavorable beneift interpretation). Ah, for the old days when we were all worried about overfunded plans.

WTYD: the new retirement paradigm.

[david rigby]

WTYD: the new retirement paradigm.

It's not as new as you think.