Use of interest rate in the cross test

[BG5150]

The available rates to use are 7.5% to 8.5%.

We've always used 8.5%

Is there ever a situation where a lower interest rate would yield better results?

[Tom Poje]

yes.

oh, you expect details? it could occur in cases in which you have HCEs who are younger than an NHCE, and the HCE receives a smaller contribution.

years ago I worked out the following example (using 1983 IAF). at 8.5% HCE2 would have no one in the group but at 8% he just gets an NHCE in the group.

who age % at 8pct at 8.5pct

HCE1 59 20% 3.325 3.393

HCE2 43 6% 3.421 3.755

NHE1 45 7% 3.422 3.721

NHE2 41 5% 3.3303 3.680

e-bar for the HCE at 8% is 3.421 and the NHCE is 3.422!

that was from the 2007 ASPPA talk.

Otis Redding put in a cameo appearance and sang "Sittin in a 401k"

Sittin' in a lifestyle fund

I'll be sittin' when retirement comes

Automatic enrollment kicked in

The default investment's a sin

I'm sittin' in a 4-0-1 k

watchin' the funds roll away

Sittin' in a 4-0-1 k

wastin' dimes.

The fees they seem to gorge-ya

Nothin' changed under P-P-A

The returns are really poor

Looks like nothin' gonna come my way

I'm sittin' in a 4-0-1 k

Watchin' the funds roll away

Sittin' in a 4-0-1 k

Wastin' dimes.

Looks like nothin's gonna change

Everything still remains the same

I don't know just what the funds will do

The amount always remains the same

I'm sittin' here resting my bones

There ain't enough to take any loans

two thousand lies on the phone

just to make this investment my home

I'm just sittin' in a 4-0-1 k

watchin' the funds roll away

sittin' in a 4-0-1 k

wasting dimes.

[Tom Poje]

here is the background music, but you have to change the extension from txt to mid

but I had to fake things out to get the attachment to work (or I think it will work)

SITTING ON THE DOCK OF THE BAY.txt

[John Feldt ERPA CPC QPA]

If you're working on a DB/DC combo, watch out for the highest HCE rate for purposes of determining the minimum gateway. If you decrease the testing rate, the present value of the accrued benefit tests as a higher HCE rate (lower rates produce higher lump sum values). So as your HCE allocation rate increases the minimum gateway could increase.

For example, suppose at an 8.5% interest rate the "HCE rate" for testing is 26%. This makes the combined plan minimum gateway contribution be 6% of pay for the NHCEs. Now, if the testing interest rate is 7.5% instead, the "HCE rate" for testing might now be 34%, making the cross-over into the next higher minimum gateway, in this example from a 6% minimum gateway to a 7% minimum gateway.

Sometimes just a lower post-retirement interest rate will get the changes that you need, while avoiding the jump by 1% into the next gateway.

There are also some instances when a different mortality table for testing will help the results. But generally, testing by using either GAM71 Male or by using IAM83 Female will probably be enough (but not always).

If you have a DB plan in the mix, you should also consider carefully which mortality tables and interest rates you'll be defining for your actuarial equivalence, and if it's a cash balance plan, consider the crediting rate and how that rate and the mortality affect both 401(a)(26) and 401(a)(4).