Plan Termination - Annuity Purchases

[JAY21]

We work with small DB plans so It's been a while since someone has chosen an annuity as part of a plan termination. I now have a few such elections on a plan termination where none of the participants are at ERA or NRA yet but want a deferred annuity. Can you remind me under a PBGC covered plan what the annuity structure must be to relieve the plan of it's liabitlies to the participant. I know it has to be an individual contract in the participant's name, and I believe since the annuity payments will start way after 90 days that their election as to the form of deferred annuity benefit will be null and void after 90 days, so does the deferred annuity essentially have to contain ALL optional forms of benefits under the plan ? Thanks for the help and reminder.

[My 2 cents]

My understanding is that the annuity has to encompass all benefit options existing under the plan being terminated (including commencement age, optional forms and optional form conversion factors). Insurance companies in the relevant marketplace should be prepared to handle this (but if the plan allows lump sums at retirement, expect to pay more because of the additional risk associated with lump sum rates and cash flow risk). Plans that permit lump sums at any time prior to commencement of benefits are particularly unattractive to insurers offering annuities. Participants currently active can potentially grow into early retirement subsidies even if they don't have the age and service as of the plan termination date. That is, someone with 13 years of service in a plan offering unreduced benefits after 30 years of service would be entitled to an unreduced benefit if they remain employed for another 17 years. If the plan's actuarial equivalence factor for a 100% joint form for a 65 year old participant with a 58 year old joint annuitant is 85%, then if a participant now 45 retires in 20 years and has a spouse then who is 58 and elects a 100% joint form, the purchased annuity must permit them to receive the 100% joint form based on an 85% factor.

You may want to work with one of the companies specializing in annuity placements.

[JAY21]

My 2 Cents, thanks for the informative response. So the insurers that you have seen have been willing/able to do the 417(e) calcs on the lump sum for plans that offer that ? I realize this is probably what makes it unattractive to insurers. I don't suppose that calculating the present value as of the purchase date using the 417(e) interest rates in effect at that time, and then having the insurance company provide a reasonable rate of return on "that" lump sum amount after that date, would satisfy the rules would it ?

[My 2 cents]

_{As I understand it, what makes it unattractive is the increased risk that demand for lump sums would peak when prevailing interest rates are high, the very time when insurance companies want to hold, not pay out, assets. If the annuities are sold with floating 417(e) rates for lump sums, it would be fairly straightforward for the annuity vendor to make the necessary calculations. Floating rates could possibly be more attractive than fixed, since when interest rates rise significantly the amounts payable would decrease.}

_{How would a reasonable rate of return be established? The rate of return earned by the insurer on its entire portfolio throughout the intervening years (on a gross basis without taking into account the cost of the insurer managing its portfolio)? What if there are down years? Would you hold them against the rights of the annuitant?}

_{Remember - no elections would have been made by either the participant or the participant's spouse at the time the annuity was purchased (other than perhaps explicitly choosing to effectively defer all option/timing decisions to a later date - if there is no election at all, the annuity must be purchased).}

[david rigby]

I don't suppose that calculating the present value as of the purchase date using the 417(e) interest rates in effect at that time, and then having the insurance company provide a reasonable rate of return on "that" lump sum amount after that date, would satisfy the rules would it ?

No. Nice try. The insurer will probably do that calculation, as well as it's own calculation of other optional forms and alternative payment dates, and take the largest of those to help determine an appropriate premium. For example, note that the 417e rates at the time of purchase date are not the rates that would be used the next year to determine the lump sum.

[JAY21]

Anyone have some insurance company names that WILL offer the lump sum based upon the floating 417(e) rates in addition to all the other usual annuity benefit options ? Thx.

[rcline46]

Try both of these. They are brokers specializing in getting annuities.

Dietrich & Associates - www.dietrichassociates.com

BCG Terminal Funding - www.bcgtermfund.com

[My 2 cents]

Anyone have some insurance company names that WILL offer the lump sum based upon the floating 417(e) rates in addition to all the other usual annuity benefit options ? Thx.

Short answer - any insurance company that sells deferred annuities to terminating defined benefit pension plans with lump sum options should be willing to structure the annuities to permit the use of floating 417(e) rates.

[ombskid]

We recently had a plan where 9 participants chose annuities - some deferred. We could not find an insurance company to take them - mostly because of the lump sum provision. 2 that quoted without the lump sum were 60% higher than the current lump sum rate. Ir ain't pretty out there for annuities.