CHICAGO (August 10, 2012)—This year’s ACOPA Actuarial Symposium kicked off with a rousing start courtesy of Norman Levinrad. Speaking at the Drake Hotel in Downtown Chicago, Levinrad presented to nearly 100 members of the ASPPA College of Pension Actuaries (ACOPA). His session was titled “Cash Balance Plans—Design, Testing and New Developments (except that we have none)”.
Cash balance plans are a popular choice for those setting up pension plans because the benefits are easier for sponsors and participants to understand. Levinrad discussed the first steps, the design process, benefits provided, and interest crediting in Cash Balance Plans, among other topics.
These issues appeal to both experts who are already designing cash balance plans and to beginners in the field. One issue of discussion was how to structure different benefit levels within the plan, and the importance of educating business owners on the strict rules governing contributions that come with a defined benefit arrangement, even though it looks like a defined contribution plan.
One other hot topic is the interest credit component of cash balance plans. The benefits in the plan grow with the interest credit each year, and a lot of thought should go into the selection of the interest crediting rate. Some actuaries may tie the interest crediting rate to the 30-year Treasury rate, or the third segment rate used to calculate lump sum payments. But a variable rate could decrease or increase sharply in a given year, and may cause your plan to fail one of the discrimination or participation tests for that year. Other actuaries may wish to tie the interest crediting rate to the performance of plan assets. This also has its pros and cons, as Levinrad described. With proper design, there could be reduced volatility in the required plan contribution by using the actual rate, but testing results could be more volatile. At least one attendee felt the market will drive plans to use actual rate of return when final regulations remove some of the uncertainly.
But most importantly, Levinrad reminded the audience that this interest assumption and its ramifications should be discussed with the client in the initial phase of the plan design, and not as an afterthought.
Levinrad brought up a lot of other issues to give actuaries food for thought. Other important topics were devoted to the need for passing the “133 -1/3 accrual test,” the important 401(a)(26) test that, according to an IRS memo, requires an accrued benefit of at least .5% of pay, and how no one should ever confuse (or allow plan sponsors to confuse) a cash balance plan with a “glorified profit sharing plan.”
One advantage of sessions at the ACOPA Actuarial Symposium is the discussion and interaction among its members. Rather than a long speech, the cash balance presentation offered many a chance to both ask questions and to provide answers to others. Just be sure to step up to the microphone and not speak from your seat!
This lively session gave a great start to would-be cash balance plan designers and provided an opportunity to exchange ideas to those who are already designing such plans.
Alan Stone, MSPA
Head of Actuarial Department | Heritage Administrative Services, LLC
ASPPA member since 1998
Category: Member Focus