411(d)(6)

[AdKu]

A plan participant was only age 57 and was not eligible for early retirement benefits based on the plan provisions in effect before the plan amendment (see below data).

Based on the answer key from SOA- the answer is C

Why do we have then compare the age 57 monthly accrued benefits when the participant retire at age 60, i.e., after the early retirement benefit amended?

Is this because of the  §411(d)(6)(A) accrued benefits or §411(d)(6)(B)(i) early retirement benefits and retirement type subsidies?

If it is because of (6)(A), I kind of understand that you cannot take away already accrued benefit.

But if it is because of (6)(B), can someone explain me why.

 

Provided

Benefit formula: 1.5% of final compensation per year of service.
Early retirement date: Age 60 with 10 years of service.
Early retirement formula:
        Before 1/1/2007: Accrued benefit, unreduced
        After plan amendment effective 1/1/2007:  Accrued benefit reduced 4% for each year the benefit
commences before normal retirement date
Data for participant Smith:
      Date of birth 1/1/1949
      Date of hire 1/1/1980
      Date of retirement 1/1/2009
     Monthly accrued benefit as of 12/31/2006 $1,650
     Annual compensation each year from 2007 to date of retirement $50,000

Question 30
In what range is the monthly benefit payable to Smith on his date of retirement?
(A) Less than $1,400
(B) $1,400 but less than $1,550
(C) $1,550 but less than $1,700
(D) $1,700 but less than $1,850
(E) $1,850 or more

[Mike Preston]

Neither?  While this question was not worded clearly, in my opinion, it stands for the proposition that 411(d)(6) protection doesn't extend to benefits not yet earned.  On 1/1/2007 the accrued benefit of $1,650 was payable at age 60 without an actuarial reduction.  The additional accrued benefit of $162.50 is payable at Normal Retirement Age.  What is interesting is the question doesn't give you the Normal Retirement Age so we don't know if it is 61, 62, 63, 64 or 65, so whatever answer you come up with has to be correct no matter the Normal Retirement Age.  Of course, this assumes that there isn't something else which specifies that in the absence of information to the contrary, there is a specific Normal Retirement.  My guess is that they want you to solve the problem based on a Normal Retirement Age of 65. If there is a specific retirement age I suggest you keep it to yourself because for obvious reasons.

So, once you accept the over-riding principle that 411(d)(6) protection doesn't extend to benefits not yet earned (This is an ERISA construct that doesn't extend to governmental plans.  In a governmental plan while there is no 411(d)(6) protection you will find that most governing authorities provide that such plans do provide for the equivalent to 411(d)(6) protection that DOES extend to benefits not yet earned.  The quid-pro-quo for this protection is that some governments reserve the right to reduce accrued or early retirement benefits, although they usually face court battles if they try.)

Hence, we know that the full benefit of $1,812.50 is not payable at age 60.

The only remaining question is whether the benefit payable at age 60 is based on either: 1) A + B; or, 2) Wear-away.  If it  was A + B it would be $1,650 + $162.50 / (1.04 ^ (NRA-60)) which is, based on my guess that NRA is 65, $1,783.56.  If it was wear-away it would be the greater of a) $1,650 or b) assuming a retirement age of 65: $1,812.50 / (1.04 ^ (NRA-60)) which is $1,489.74 leading the result to be $1,650.

So, if you mistakenly think that 411(d)(6) protection applies to unearned benefits you will come up with $1,812.50 (Answer = D) or if you mistakenly think that A+B applies you will come up with $1,783.56 (also Answer = D) and if you don't have a clue about 411(d)(6) protection and think that the early retirement benefit is not protected you will come up with $1,489.74 (Answer = B).

But the correct answer is (C), because of A=B and 411(d)(6).

Unless I have misunderstood something about the problem.

 

[My 2 cents]

My apologies, Mike, but I cannot restrain myself!

1.  If this were from an enrollment exam, then it is to be assumed that, absent information to the contrary, NRA is 65.  That is one of many, many explicit conditions (such as plan entry is on date of hire, the plan is non-contributory and the plan meets all qualification requirements).  I don't know if actual SOA exams (if this was from one) have a similar set of explicit conditions.

2.  On a more technical point, if the early retirement reduction is 4% per year early, one would get the early retirement adjustment at age 60 by using 5 X 4% as the reduction, not by dividing by 1.04^5.

3.  Agreed that grandfathering of an adverse change in the early retirement reduction would never (absent an explicit provision in the amendment to the contrary) involve anything other than a pure wearaway.

[Mike Preston]

1. My point is that it is grossly unfair to expect help with an educational exercise where known criteria have to be guessed.

2. Your technical point is correct, although it doesn't change the range in either of the calcs.

 

[My 2 cents]

9 minutes ago, Mike Preston said:

1. My point is that it is grossly unfair to expect help with an educational exercise where known criteria have to be guessed.

2. Your technical point is correct, although it doesn't change the range in either of the calcs.

 

If the problem were from an EA exam, the candidates taking the exam are expected to be familiar with the general conditions (such as NRA being 65 unless specified otherwise).  While there may be gross unfairness occurring here in the BenefitsLink discussion concerning what NRA may be (perhaps the OP should have mentioned what NRA is), there should be no unfairness at all for those taking the EA exam, who should not only have familiarized themselves with the plethora of general conditions but who would (I believe) have access to a copy of the general conditions handed out at the exam itself and available for reference during the exam.