Conservative Investment Strategy

[Andy the Actuary]

A one-person DB plan is contemplating investing 92% of its assets in a bond portfolio of high quality bonds that will mature in 2 to 10 years and will have an overall yield of a little over 2%. The participant is age 54 and the plan has a normal retirement age of 62. The plan benefit is 100% of the 415(b)(1)(B) compensation limit. The participant is contemplating this action as part of an overall balanced investment strategy in which the pension plan bears the conservative element. This will facilitate plan assets not exceeding the 415 limit.

Given that 430 discount rates would be expected to be much higher, is there any problem such as unreasonableness of deduction or violation of prudent man rule. Just want to ensure there are no woodpeckers in the wood pile.

[SoCalActuary]

No problem with the deduction rules, which are governed by the 430 regs for assumptions.

No problem with the fiduciary rules - one-person plan.

No problem with the low expectations for the investments, since his investment horizon is short.

The experience losses on investment will justify a higher deduction later, although he can pre-fund a portion of the benefit now using the cushion amount.

[Andy the Actuary]

Mr. SCA, thank you for your comment.

My question about assumptions was a throwback to the old Jerome Mers* case where the IRS challenged the interest rate of 5% as being too low ("5% too low? That's a real laugh Mrs. Robinson!"). So, I says to myself, "Self, even though the courts upheld the 5% as reasonable, would that preclude the IRS from revisiting this issue from a different angle, namely, that the investment strategy was unreasonable?" I.e., plan assets would be invested in a way that could not possibly approach the prescribed discount rates.

*I think I may be older than my photo would suggest!!!

[david rigby]

...would that preclude the IRS from revisiting this issue from a different angle...

Perhaps I'm a cynic but it seems reasonble to say that nothing precludes the IRS from doing anything.

[SoCalActuary]

...would that preclude the IRS from revisiting this issue from a different angle...

Perhaps I'm a cynic but it seems reasonble to say that nothing precludes the IRS from doing anything.

But you have an excellent chance of surviving an audit if you stayed within the regs.

[tymesup]

Coincidentally, I was talking about the Mirza case today.

Considering the market of 2008, it's hard to imagine the feds questioning this investment strategy.

Considering the punitive excise tax for an overfunded plan, this might not be a bad strategy.