frozen DB

[K2retire]

We're taking over the 401(k) for a non-profit organization that also has a frozen DB plan. I last worked on DB plans prior to PPA, so I know there are a number of changes that I am not familiar with. The plan is currently underfunded, so they have been told that there are restrictions on lump sum payments.

The client believes their actuary told them that freezing the plan freezes the PVAB, not just the monthly benefit. We had a lengthy call today between us, the new record keeper for both plans and the client. I was quite surprised to learn that the PVAB has appeared on participant statements along with the monthly accrued benefit. (Is that a new requirement?) Apparently the majority of the participants are expecting that to be the new permanent "balance" in their accounts in the DB plan as soon as the funding increases enough to remove the lump sum restrictions.

Anyone have a one or two sentence way to explain why the lump sum amounts will continue to change?

[Andy the Actuary]

PVAB increases with passage of time so that value matures to present value at normal retirement age. Increase for interest as well as survivorsip (i.e., to reflect assumed mortality that didn't occur).

[david rigby]

Is this a cash balance (or other) hybrid plan?

- If so, showing a balance probably makes sense (but it won't be frozen).

- If not, take the PVAB off the statements. Never use the word "account", always emphasize the annuity form of the accrued benefit.

[K2retire]

Is this a cash balance (or other) hybrid plan?

- If so, showing a balance probably makes sense (but it won't be frozen).

- If not, take the PVAB off the statements. Never use the word "account", always emphasize the annuity form of the accrued benefit.

Not a cash balance plan.

The discussion came up because the sample statement from the new recordkeeper didn't include the PVAB and the client wants it added!

[rcline46]

You need to explain to the client that the PVAB is calculated according to 417(e) rates published by the IRS, and that the PVAB is not a guaranteed benefit as it is subject to interest fluctuations, and upon a person terminating it must be calculated to the date of payment.

Showing it on an annual statement provides misleading information to plan participants. If necessary, get your actuary to explain it to the client.

[frizzyguy]

The discussion came up because the sample statement from the new recordkeeper didn't include the PVAB and the client wants it added!

I worked for a DB administration firm that had a major client move over that insisted for the same thing. We ended up showing the lump sum using the plan rates, even if the 417(e) lump sum was larger because that way we were always conservative. We only updated it annually and had to send it to the recordkeeper every January.

I think it made retirement planning misleading for participants and wasn't a huge fan of it myself but the client was very pleased with the result.

As far as why the lump sum changes from year-to-year making it nearly impossible to predict is because the IRS mandates that plans maintain a minimum lump sum actuarial equivalence factor to protect participants from getting swindled by a pretty lump sum amount when an annuity might be worth significantly more. This actuarial equivalence definition isn't based on a static number and changes at least every year depending on the plan provisions. It's based on the economy.

I hope this helps.

[StormShadow]

This was not part of the your question, however I just want to remind you that if the DB plan was a hard freeze before 9/1/2005, it is not subject to accelerated distribution restrictions under PPA.

Back to the original question. I second rcline - if the PVAB is going to be shown at all, it needs to be caveated to the maximum especially the fact that the PVAB may decrease.

[SoCalActuary]

We're taking over the 401(k) for a non-profit organization that also has a frozen DB plan. I last worked on DB plans prior to PPA, so I know there are a number of changes that I am not familiar with.

Run, do not walk, away from assignments you don't have capacity to handle.

[K2retire]

This was not part of the your question, however I just want to remind you that if the DB plan was a hard freeze before 9/1/2005, it is not subject to accelerated distribution restrictions under PPA.

Back to the original question. I second rcline - if the PVAB is going to be shown at all, it needs to be caveated to the maximum especially the fact that the PVAB may decrease.

The hard freeze takes effect 7-1-2012.

We're taking over the 401(k) for a non-profit organization that also has a frozen DB plan. I last worked on DB plans prior to PPA, so I know there are a number of changes that I am not familiar with.

Run, do not walk, away from assignments you don't have capacity to handle.

Fortunately I will only be handling the ongoing 401(k) piece.

[SoCalActuary]

Since you have no role in the DB, I assume you are just curious.

[K2retire]

Since you have no role in the DB, I assume you are just curious.

Partially curiosity, partially trying to accurately support what the DB guys are saying since the client doesn't want to believe them.