Operational failure in a DB prototype?

[QNPG]

In the Corbel prototype, it explicitly prohibits the use of a J&S 100% as the normal form. In the administration of plans at a previous firm at which I worked, it was common practice to "fund" for the normal form with J&S 100% although the DB used a prototype and the stated normal form was "life only". The reason they thought that this was acceptable was that under the forms of distribution section, the subsidized benefit of J&S 100% at NRA was offered.

Is this permissible?

[Effen]

When you say "forms of distribution section, the subsidized benefit of J&S 100% at NRA was offered", what do you mean?

Does that mean that the monthly benefit paid under the J&100S was equal to the life annuity, or does it mean they don't charge the participants for the pre-retirement death benefit, or does it mean the J&100S is reduced, but by less than the true actuarial equivalence.

When I hear an actuary say "subsidized J&S", I usually think that means the plan does not charge for the pre-retirement death benefit. Virtually all small plan's have a "subsidized J&S". This would not impact my assumption related to the anticipated form of distribution at retirement. However, if a participant who selects the J&S benefit at NRD receives the same amount they would have received as a life annuity, I might value the J&S, unless the plan offers a lump sum, which would generally be the option of choice.

The actuary is supposed to base their assumptions on what they really think will happen. They generally look to past experience to justify the assumption.

This kind of thing is usually "reasonable" vs. "unreasonable", not "right" vs. "wrong".

[ScottR]

In the Corbel prototype, it explicitly prohibits the use of a J&S 100% as the normal form. In the administration of plans at a previous firm at which I worked, it was common practice to "fund" for the normal form with J&S 100% although the DB used a prototype and the stated normal form was "life only". The reason they thought that this was acceptable was that under the forms of distribution section, the subsidized benefit of J&S 100% at NRA was offered.

Is this permissible?

Yes. If a subsidized J&S benefit is selected in the adoption agreement, it means that a married participant's monthly J&S benefit will be the same amount as his SLA benefit. For funding purposes, I believe it would be totally proper to assume that all married participants will elect the J&S annuity rather than the SLA. Why wouldn't they?

... Scott

[Andy the Actuary]

For funding purposes, I believe it would be totally proper to assume that all married participants will elect the J&S annuity rather than the SLA. Why wouldn't they?

... Scott

Because they wanted to punish their spouse?

[SoCalActuary]

In the Corbel prototype, it explicitly prohibits the use of a J&S 100% as the normal form. In the administration of plans at a previous firm at which I worked, it was common practice to "fund" for the normal form with J&S 100% although the DB used a prototype and the stated normal form was "life only". The reason they thought that this was acceptable was that under the forms of distribution section, the subsidized benefit of J&S 100% at NRA was offered.

Is this permissible?

I read the Corbel prototype language to allow a fully subsidized 100% J&S form of payment. This creates the legal right for married or unmarried participants to have the survivor protection. Further, the actuary should be making assumptions as to the expected future benefit payments. If this right exists, the actuary has a reason to assume that people will take free money.

This does not create the presumption that a lump sum payment must be the actuarial equivalent of the 100% J&S benefit, in my opinion. So a plan that has a history of lump sum payments would have a reasonable fact pattern for the actuary to assume some percentage of retirees will receive a lump sum equivalent of the life annuity form.

[QNPG]

Thank you, Gentlemen.