Am I Missing Something?

[Andy the Actuary]

The attached article (http://www.retirementtownhall.com/?p=2420) was provided through benefits link. It suggests that since interest rates are low, it may make sense to borrow to contribute to the pension plan to reduce the PBGC variable rate premiums.

The PBGC variable rate premium is 9/10 of 1% of the unfunded vested benefits. So, if you can borrow say on an interest-bearing note to pay down the unfunded vested benefits, then PBGC premiums are reduced. But, there is a cost to borrowing, and so long as the rate at which you borrow exceeds 9/10 of 1%, there is added cost to this approach unless you're in a nonexistent 100% tax bracket. Worse, would be if interest rates soar. In such case, (a) the unfunded vested benefits -- all things being equal -- will reduce anyway, (b) you will have to pay even a higher interest rate on borrowed money, and © you can't withdraw the money from the pension plan to pay down the loan.

Is there some advantage that I may have overlooked?

Why_Pay_PBGC_Premiums.pdf

[JanetM]

Andy,

The only way I can see it working is if the amount of the tax benefit due to the large contributions out weights the cost of interest on he borrowed funds.

[david rigby]

There is another angle: does someone get a commission on the borrowed money? If so, there is an incentive to encourage borrowing.

[frizzyguy]

There is another angle: does someone get a commission on the borrowed money? If so, there is an incentive to encourage borrowing.

Haha, I love this comment. Maybe you could borrow from a Universal Whole Life Insurance Policy...BUT WHAT ABOUT THE INSURANCE?!? I would be a little suprised considering the source if there wasn't some validity to this point. The company that sponsors this article has a great reputation and is conservative with what the publish (IMHO) but I am with you guys, I have no idea how there is an incentive.

We have been bouncing this one around the water cooler and no one can think of anything. I am very curious though.