PVAB for owners will show large decrease next year?

[SSRRS]

Hi,

As always the insights are appreciated. Frozen plan with two owners. Their PVAB is in the 800k range. Next year with the 417(e) rates going up dramatically, the PVAB will be in the 600k range.  I understand only the AB cannot be reduced, however, the pvab can. However,  will clients be upset that their PVAB is decreasing? Thank you .

[david rigby]

As I recall, the use of 417 rates is to provide a minimum PVAB.  Is that what your research shows?

[SSRRS]

1 hour ago, david rigby said:

As I recall, the use of 417 rates is to provide a minimum PVAB.  Is that what your research shows?

Yes indeed. However, the pvab was so high last year because the 417e rates were very low. Therefore, now that the 417 rates have gone up dramatically, even if the 417 pvab is a minimum, and possibly the plan equivalence will now  produce a higher pvab to be used (greater of the two)  however, the current pvab will still not be as high as the previous years pvab that was based on the very very low 417 rates.

[SSRRS]

In other words, these fluctuating 417 rates is causing a lot of headaches and explaining. Clients have a hard time understanding how their "benefit" went down by 200k. 

[Effen]

Everything you are saying is correct, but "good / bad" is all in the sponsors perspective.  Larger plans see rising interest rates as "good" and are taking advantage of them by offering lump sum windows and buying annuities in an effort to de-risk the plans and shed liability.  Annuity purchases and lump sum windows were at all time highs during 2022 and are still trending up in 2023.

Smaller plans may see rising rates as bad for the reasons you suggest, but as David pointed out, the sponsor are not required to use 417(e) rates for lump sums and many small plans only use them for a floor.  Part of the problem may be caused by the way the benefit has been explained to them.  If they have been shown their 417(e) based PVAB every year, it needs to come with an explanation of how that can fluctuate.  We typically never show the PVAB on benefit statements for just this reason.  It is also the reason why cash balance plans have become so popular because they are insulated from this issue.

This is one of those good "consulting opportunities".  Sponsors should understand how their plans work, and if they don't like it, they generally have the opportunity to change it.

 

[Bri]

Hopefully they aren't also staring at their 415 max lump sum on the other end of the calculations....

[SSRRS]

Thank you Effen, and Bri. As usual, your vast knowledge and analytical minds assessed the situation perfectly and much appreciated. Yes, as you say sponsors do benefit in that employee lump sums will go down dramatically. Thus easing the liability burden. We,  as well, do not show the PVAB on Participant Statements . However, some clients for their financial statements request separately each year their PVAB. 

Also are you saying that the pvab is a floor only and to keep the owners pvab consistent you would adopt a plan equivalence of 4.5%,or less? This might be a genius idea if the plan was owner only, and I thank you. However, this plan has some employees as well.

So most likely does not pay to lower the plan equivalence below 5%. Rather, we will present it with a disclaimer as you mention. 

Thank you!

 

[CuseFan]

Good communication/consulting with the client is the key. This really doesn't matter now unless the plan is terminating or one of the two owners is exiting and plan is sufficiently funded to pay out. Otherwise, I would continue as is until some event triggers needed action to realize desired outcome.