3rd segment rate for averaging assets

[My 2 cents]

Under the IRS regulations, the expected investment income for a year for asset averaging purposes is to be based on the lesser of the prior year's third segment rate or the enrolled actuary's best estimate of the rate of return on assets. Last year's third segment rate (under MAP-21) was 7.52%. Are people using that or a lower rate when averaging assets for a plan year beginning in 2013?

[Rball4]

Using min of 7.52% and asset return assumption from FASB calculations.

[Effen]

I think your assumption needs to be a little stronger. What you wrote implies that it can change year by year based on the actuaries best estimate in that year. That may be ok, but it feels a little vague. I typically use something like, the lesser of the 3rd segment rate or 7.0%. I also have some where we just use the 3rd segment rate without any static rate maximum.

Unless the actuary is also an economist, I am not sure they would be qualified to estimate the rate of return from one year to the next.

And yes, 7.52% would be the rate, if it is lower than the static rate assumption I am using.

[david rigby]

I think either of these answers is reasonable. Most importantly, it should be part of the asset valuation method, and should be clearly documented.

[Andy the Actuary]

Re: David. Given that you may want some flexibility, you may want to describe the asset valuation method in terms of the investment assumption and then state the investment assumption under your assumptions section. That way, when you change assumptions, you're not changing the AVM.