Cash Balance New plan design

[AndyH]

Anybody willing to share any new Cash Balance design suggestions?

In addition to the obvious interest credit question, what are others using for actuarial equivalency? I've heard that most used 417(e) rates but that seem unnecessarily complex with the segment rate 417(e) changes and phase-ins. I recently saw a takeover with actuarial equivalence defined as UP84 at 8.50% which obviously equalled testing rates and I suppose eliminated the MVAR calculation - interesting. Thoughts?

What about interest on payouts to terms - are most calculating interest quarterly? daily?

[Guest Deflector]

Nothing really new, but I have stuck with the old 417(e) - GAR at the 30 yr treasury. Watch out for the 1 month lookback for new plans, since the December 2008 rate is at 2.87%. I am considering going with a fixed rate, but have not went there yet. If I do it would probably be 5% that I would pick. I have also heard of people using that.

UP 8.5%, seems like a high "market" rate and may not be considered reasonable.

I tend to do the distributions with interest, on a semi-monthly basis typically. We get the paperwork back, which makes it easier to monitor the actual payout dates. I have not had that many vested distributions yet in my cash balance plans.

[John Feldt ERPA CPC QPA]

One actuary we work with has recommended an actuarial equivalence definition that includes a pre-retirement interest of 8.50% for all forms of benefits that are not subject to the minimum present value requirements of Code Section 417(e)(3); and, for all other forms: the Applicable Interest Rate.

Then for the interest crediting rate on the hypothetical account: the rate of interest on long-term investment grade corporate bonds (as described in Code Section 412(b)(5)(B)(ii)(II), such code section as it existed prior to amendment by the Pension Protection Act of 2006) determined as of the first day of the Plan Year for which the Interest Credit shall be applied. That has been (or it was anyway) closer to the funding rate.

[Blinky the 3-eyed Fish]

One actuary we work with has recommended an actuarial equivalence definition that includes a pre-retirement interest of 8.50% for all forms of benefits that are not subject to the minimum present value requirements of Code Section 417(e)(3); and, for all other forms: the Applicable Interest Rate.

So as Andy mentions he is doing this to lower the MVAR. I suppose if he has det letters so be it, but I would not be inclined to force such manipulations of the numbers. Of course this too will increase the amount of the annuity optional forms of benefit. I know I have never seen an annuity taken when a lump sum is offered, but in this case, with such askew numbers, someone could take the annuity and really screw the plan. And they will be aware of the value differences with the relative value disclosure. I see a problem a-brewin'.

I have some plans at 5% interest crediting rate. I not overly thrilled I did that with the warning issued in the proposed CB regs, but I am not losing sleep. I have to think 5% will be okay in the final regs. Inherently I like a flat rate because of the consitency it provides if needing to pass general testing or if 404(a)(7) is an issue. For those clients, I have gone into some details, explained what's in the proposed regs, discussed why I think a flat rate is best here, set them up at 4% normally and warned them in writing. If they don't have those issues, perhaps a variable rate, like the 30-year Treasury Rate is best. I still believe 5% or under will be fine. Did I say that already?

I always like to match AE to the interest crediting rate. It is just easiest.

I like either quarterly or monthly interest credits just from a fairness standpoint. Obviously annual interest credits are easiest to deal with but I don't like the idea of someone's CB remaining static for a year.

[John Feldt ERPA CPC QPA]

Interest to terminees - annual is ok - probably best for the very small plan.

But if the plan is truly to attract high level number crunching employees, like say, international investment bankers, or rocket engineers, etc. then don't try annual - go with monthly or at least quarterly there - your call center reps will not know to thank you enough, but they'll feel the pain if the credit is annual.

Until PPA, I think the preference was the 30-year treasury. The new funding rules have made some re-think that especially for new plans - trying to get a normal cost that is reasonably close to the hypothetical pay (or service) credits. It sure is/was nice to have the AE match the crediting rate. Then the end of 2008 came along and the drop in the 30-year treasury (from 4.50% in August to 2.87% in December) made passing 401(a)(26) a worry. Perhaps a different rate would retain more stability for 401(a)(26) purposes? Of course a fixed rate would help us there, but how do you know if the fixed rate exceeds market - if the 30-year treasury was 2.87%, was a fixed rate of 5% okay? How about 4%? 3?

I suppose if he has det letters so be it, but I would not be inclined to force such manipulations of the numbers. Of course this too will increase the amount of the annuity optional forms of benefit. I know I have never seen an annuity taken when a lump sum is offered, but in this case, with such askew numbers, someone could take the annuity and really screw the plan. And they will be aware of the value differences with the relative value disclosure. I see a problem a-brewin'.

Sure, every cash balance plan needs to get their D letter (full scope would be best). Yes, a potential problem could occur, but size matters - so is it a tiny little problem, or bigger? In a plan that uses this extreme definition, the owners' cash balance credits are the majority of all liabilities in the plan (90% and up - we've seen 99%). The NHCEs would generally be receiving a flat amount per year, such as a $500 flat amount. Over 10 years (that's a long life for these plans) that $500 per year credit for the NHCE (if they satyed that long) has become maybe $6,500 ? or thereabouts - that's probably not enough to truly worry about the selection of an annuity.

There was a time that we have seen an annuity selected - the participant could not obtain spousal consent. $53 per month J&S 50% starting at age 45 - yeehaw.

Hopefully the "reserved" section will be written soon and we'll get fixed rate guidance. If the guidance is not too burdensome, then we think a fixed rate is likely the place we oughta be. Hopefully we'll be allowed to switch.

[Effen]

Interest to terminees - annual is ok - probably best for the very small plan

Maybe I am misunderstanding what you mean, but where have you ever seen it said that you only need to credit interest annually? Are you talking about distributions?

Certainly prior to PPA this would have violated 417(e) and/or 411(d)(6). I'm not sure about post PPA, but it certainly doesn't seem reasonble to me.

Lets say I have a cash balance account balance of $10,000 on 1/1/09 and it produces a monthly annuity of $115 at NRD. If I terminate in October and you only pay me $10,000, it would only be worth $110 as a monthly annuity at NRD. Since 110 is less than 115, I think I have a 411(d)(6) violation. Or, if you say my annuity is still $115, then the present value in October has to be more than it was in January. (All this assumes CY plan.)

I'm am ok with 411(d)(6) type problems when you go from one plan year to the next because they are caused by changes in the market related interest rates, but I think you need to credit interest to the day (or maybe at least monthly) to the cash balance accounts for a distribution. BYW, I feel the same way about lump sums in traditional db plans as well.

[AndyH]

Excellent insights by everybody!