Adjustable Benefits, Defined Benefit Plan with Low to No Vo - PowerPoint Presentation

Slide1

Adjustable Benefits, Defined Benefit Plan with Low to No Volatility for the Plan Sponsor

HR Specialty Products & Services Catalogue Executive Summary

- A No Frills Distillation of Vendor’s Marketing Collateral -

Thomas A Ference

President & CEO

Human Resources Mining & Distribution Co

Locating, Validating and Accelerating HR  Innovation

Office: 219-662-0201

Cell: 630-240-2583

Fax: 219-661-0236

e-mail:

tference@hrmdco.com

Website:

www.hrmdco.comSlide2

Adjustable Benefits, Defined Benefit Plan with Low to No Volatility for the Plan Sponsor

DC

plans

saddle participants with

investment, mortality and other

risks

and no longer provide plan sponsors with much competitive hiring advantage or longer term retention value. This creates

a lose/lose proposition.

This

new type of

“adjustable” defined

benefit

is specifically designed by the actuaries to have little

to no contribution volatility

nor any

unfunded liabilities

of significance for the employer. Participants in turn have no investment management risk nor can they outlive their retirement incomes. This creates a win / win proposition

This works where participants’

annual benefit accruals are adjusted as needed

per pension formula design and assets are managed to track liabilities so

as to create financial

stability for

all.

The

plan

is funded

with

employer contribution dollars:

a) that

get redirected from an existing DC

plan so as to protect employees at

retirement and create much needed “glue’ to keep employees around or,

b) coming from

a modified /

frozen DB plan where the new adjustable DB serves as

a compromise for participants who would otherwise have no future pension accrual

. Slide3

How this Plan Works – Typical Example An identified source of employer contribution is matched to a future-service-only, career pay formula expressed as a % of each year’s pay using an assumed low risk rate of investment return e.g. 5%. This formula produces a minimum / floor benefit

Next, an adjustable benefit formula is designed that reflects the difference between the assumed rate of investment return and the actual investment return. If actual investment performance for the year is greater than the assumed rate, the adjustable benefit is increased and if lesser than assumed, it is decreased.

The amount of actual investment return shared under this formula is capped with excess earnings above the the cap to be held in an experience stabilization reserve so as to smooth out contributions and liabilities for the employer

The benefit earned each year under each formula is tracked and accumulated until retirement. At that time, the participant receives the greater of the two strings of accumulated benefits from one of the two formulas Slide4

Example Assumptions - Employee X

Assumptions

Year One

Year Two

Assumed Floor Benefit ROR

5%

5%

Actual ROR

8%

2%

Annual Floor Benefit Accrual

1%

of Current Year’s Pay

1%

of Current Year’s Pay

Employee X Current Year’s Pay

$60,000

$61,000

Adjustable Benefit

Accrual

Accumulated Units X Current Year ROR Adjusted Unit Value

Accumulated Units X Current Year ROR Adjusted Unit Value

Actuarially-Determined ROR

Adjusted

Unit Value Beginning of Year

One

$10Slide5

Example Calculations –Employee X

Item

End of Year One

End of Year Two

Annual Floor Benefit Accrual

1%

X $60,000 = $600

1%

X $61,000 = $610

End of Year ROR Adjustment

8%

- 5% = + 3%

2% - 5% =

(

3%)

Current

Year ROR Adjusted Unit Value

$10 X (100%

+

3%) = $10.30

$10.30 X (100% - 3%) =

$9.99

Current Year Unit Accumulation

=

Annual Floor Benefit Accrual Divided by Previous Year’s ROR Adjusted Unit Value

$600 /

$10 = 60 Units

(For the First Year Only, the Unit Value is Actuarially-Determined

$610 / $10.30 = 59.2

Units

Accumulated Floor Benefit Accrual

$600

$600 + $610 = $1210

Adjustable Benefit

Accrual = Accumulated Units X Current Year ROR Adjusted Unit Value

60 X $10.30 =

$618

(60 Units + 59.2 Units) X

$9.99 = $1,190.81Slide6

Accrued Benefit Example After 6 Years

At the end of year 6, the Accumulated Adjustable Accrued Benefit is $3,183 vs. the Accumulated Floor Benefit of $3,100. The Participant’s Accrued Benefit then is the $3,183. Slide7

Funding Ratio Modeling

An Investment Strategy that also considers the surplus asset buildup arising from the investment return sharing cap is developed and modeled to assess the underfunding risk Slide8

Another StrategyUsing the same type of career pay benefit formula, the annual accrual rate (say 1% of each years pay) can be modified by formula.

A pro-forma valuation is performed in the 4

th

quarter of each year to determine how the funded status of the plan is and the accrual rate is adjusted up or down as necessary based on the funded status of the plan, the cost of benefit accruals and the level of contributions made by the employer.

As the actuaries work with various firms, they consider the needs of the employer and help them with understanding new options and creative plan design strategies.Slide9

Next StepsThis product/service is contained in the HR Specialty Products & Services Catalogue™

Operational

level details about this particular service provider can be obtained in conference with the vendor

The

HR Mining &Distribution Co. is an independent and contracted representative of the vendor

Upon

your request, we will arrange for an introduction that can range from a simple, quick conference call to a services overview / system demo

Tom

Ference 219-662-0201 (Chicagoland area) or tference@hrmdco.com

Thank

you for your potential interest in this fresh thinking