What is cost to add a lump sum option?

[tuni88]

Our DB plan does not have a lump sum option. If we were to add one, by what percentage might our liabilities increase? What has been anyone's experience with this? Have any of you actuaries run a model on an actual plan?

[david rigby]

This question can be best answered by the plan's actuary.

Or you can hire another actuary for this analysis.

[Mike Preston]

Since we don't know what benchmark you would be measuring against, it is hard to provide a meaningful answer. If you are interested in generalities, you might look into old PBGC instructions for premium payments. In those instructions, the PBGC lays out a methodology of determining what the modified liability is based on a theoretical retirement age and a "before" and "after" interest rate. Then you would need to determine what the "before" (your current interest rate) and the "after" (your new interest rate - perhaps the effective rate?) interest rates should be.

I'm not saying this will definitely determine an accurate answer to the question you pose, but it may provide you with some insight.

Otherwse, what David said.

[tuni88]

Sorry, I don't understand nearly the entire first paragraph re PBGC. Accurate answer? I'm just looking for a possible range of how cheap it might be (free? - probably not) or how expensive it could get (doubles the plan liabilities? - hope not).

Any of you actuaries ever made such an estimate on an actual plan? Ever done a napkin statistical wild a. guesstimate? Do actuaries do napkin swags? I don't expect the swag to be worth much more than I'm paying for it.

[david rigby]

I don't expect the swag to be worth much more than I'm paying for it.

Most actuaries (me included) prefer to be paid for our work. Just guessing, I suspect that the actuary for this plan is in the same category. I could, but won't, provide a swag, primarily because the answer (even a ballpark range) depends on several factors.

[tuni88]

the answer (even a ballpark range) depends on several factors.

------------------

Yeah, I know. That's why it's called a swag.

Ok, I withdraw the swag request. No napkin calculations allowed - hearsay only.

Anybody heard any anecdotes around the water cooler about the cost of adding a lump sum option to a DB plan? Man, you guys are serious.

[Blinky the 3-eyed Fish]

The cost of adding a lump sum feature is bigger than a breadbox and half past a monkey's butt.

[Effen]

The "cost" is difficult to quantify. It depends on what rates you use to determine the lump sum and current market conditions. If you simply use 417(e) rates to determine the amount of the lump sum, it could produce liabilities higher or lower than the funding target (assuming you are using segment rates). Since the segment rates have a 24 month average built into them and the 417(e) rates do not, the segment rates will be higher or lower than the 417(e) rates at any given point. When segment rates are higher (like they are now) lump sums are higher than the funding targets. If the segment rates are lower than the 417(e) rates, lump sums wil be lower than the funding targets.

PPA changed the playing field. Assuming you are using only 417(e) rates for lump sums, the only change in the funding target would be the mortality. However, the "shut down" liabilities may move +-20% (SWAG) depending on the rates at any particular point in time. If you use something other than 417(e), the impact will be based on the rates you choose. Lower rates, higher change.

Now, go hire and actuary

[AndyH]

... you might look into old PBGC instructions for premium payments. In those instructions, the PBGC lays out a methodology of determining what the modified liability is based on a theoretical retirement age and a "before" and "after" interest rate. Then you would need to determine what the "before" (your current interest rate) and the "after" (your new interest rate - perhaps the effective rate?) interest rates should be.

Otherwse, what David said.

Ah, the solution to all ills, especially sleeping disorders - the PBGC instruction booklets!

Do we really think that if tuni doesn't know how how to evaluate the cost of a lump sum provision under PPA two years from 417(e)/funding "equalibrium" that he/she will be able to decipher the PBGC instructions and formulas!

The answer might approximate Blinky's result.

tuni, I'm told that currently annuity purchase costs are about 20% higher than lump sums. But that is right now, and the third option is paying an annuity benefit from the plan and that must take into account expected investment earnings, investment and interest rate risk, mortality risk, expenses, etc. so there are a lot of "what if's" to consider. Plus, the actual plan circumstances and longevity are critical. So you need to hire a 3 eyed fish to guide you.

[tymesup]

If the plan's early retirement benefits were subsidized, adding a (non-subsidized) lump sum could lower the plan liabilities.