Cash Balance plans done the right way

[Andy Lang]

Asking the right question for seemingly intractable problems is often vital to find the right answers.

Here is the right question, stripped to it's essence, if you wish to fix the traditional DB pension plan (and I do) by doing a cash balance type of modification.

A company wants to pay you one million dollars at the end of 40 years if you work for them for 40 years.

They intend to accumulate and invest money each year, as a level % of your pay, such that at the end of that 40 years they will have the one million.

They call it part of your deferred compensation, and the annual amounts are tax deductible to them and the investment returns are also not taxable during the accumulation period.

Q: What is the only right way to divide that million dollars so that if you should leave before the 40 years is over, whether voluntarily or involuntarily, you and the company both get fair treatment?

Assume a level interest rate of i=9% each year.

You get nothing if you should die in that 40 year period, but I wish you to:

a. first ignore mortality and then
b. take it into account and tell me approximately the difference if the 40 year period ends when you are age 65.

Use any reasonably current mortality table you wish, but disclose it.

[Andy Lang]

Ahhh, you guys are no fun.

I practically give you the answer in the question and you still remain silent.

Whatever happened to old-fashioned compound interest and life contingencies, anyway?

[mikey]

If Andy complains about the "early termination" penalty in the forest and no one is there to listen, would he move to another forest or just keep complaining?

[Dr T Non-Fan]

I vote for the former, yet I already feel sorry for those trees.

[Andy Lang]

Be glad I don't complain about the early termination penalty in life insurance policies, ie, the excess of the reserve over the cash value--lobbied in by the life industry, natch.

John Nash and a host of other economists and mathemeticians, received the Nobel Prize for their work in showing that often when you do the right thing, and make the game 'fair', there are no losers, only winners.

In the actuarial game, however, they are slightly wrong.

True, in doing the right thing, the winners are many; the plan participants, all the employees, the company and it's shareholders, the efficiency of the economy and financial markets, the American people, society, and democracy and freedom.

But there are some big losers too, in doing the right thing: pension plan sponsors that screw their own employees, greedy CEOs and other top executives, members of the Board who are either asleep or part of the cabal, the right-wing and the GOP, accountants who rig numbers of financial statements, the management consultants and firms who feed all this crap, and of course, the grand-daddy of all the losers, the bad actuaries who have been screwing the public first within the insurance industry and now, since the 80s, the once vital defined benefit pension industry, and all those other so-called 'independent' actuaries who have sold the public and their own profession down the river, along with the future of today's younger actuaries and those to come.

Ohh, I almost forgot another big loser: fascists who have been making a big comeback and think that no one has been watching.

But unfortunately we have--me especially--for a long time too.

And if you know the slightest thing about me, know this: I never give up, am a lot smarter and wiser than most, know how to get almost any piece of information about any group or any person, and am going to destroy them, by making public what many do not yet understand, but in their hearts they know somethng has gone terribly wrong in America.

The wrath of the American people ,and their anger, is both awful and marvelous to behold.

Think of several hundred million people acting like Christ in the Temple against the money lenders, or against the stone-throwing mob, or against those, both religious and non-religious, who would betray trust.

Then think of several billion people doing the same thing.

Think of Catholics who have been abused or had their kids sexually abused and physically for years by priests and had it all covered up for decades by other priests and the top of the heirarchy and you will get my drift.

[Andy Lang]

PS..my daddy was 65 years in the press and I know many still at AP and many other news organizations, as well as quite a few at the top levels of business, Washington DC, and in the sports and entertainment world--just like my daddy did--and quite a few more.

My E-mail list is many hundreds long and some you might even recognize. Some are in fact some of the wealthiest and most influential people in the world.

They often get copies of what I write and of my speeches.

Just think--YOU are on Candid Camera.

ciao...

[mikey]

And Ken Lay had a whole bunch of people listening to his every word. You're still wrong about the "early termination penalty" being a significant issue regarding the revival/survival of the DB plan.

DB plans have been/are on the outs because:

1) employees don't appreciate them.
2) DC plans are cheaper for employers and the costs less volatile.

Some of the major reasons employees don't appreciate them:

1) don't understand them - How are lump sums based on EA acc liab going to make them less complicated and easier to understand?
2) No portability in that you are stuck with this deferred monthly benefit you can't get for many years - You EA lump sums make this even worse, pushing more people above the small benefit cashout limit and other limits (10K is common) that plans put on lump sums.
3) people think a bigger number is always better, hence a 100,000 account value always looks better than 2000 per month deferred to 65, which is why people are hurt by DC plans, they have no idea how much money they need in their pot at 65. EA lump sums do nothing to solve this problem either.

They also make plans more expensive and costs more volatile since it takes out the margin between funding and benefits.

So, your strategy won't make employees appreciate DB plans more, but they will make employers like them less. Yes, that sound like just the fix we need.

[Jack]

You could take a nonforfeiture type approach.

1M*((v65-x)(65-xpx))-Contribution*(a_double_dotx angle (65-x))

I assumed no inflation or wage growth.

What am I doing wrong my super/subscripts don't work?

[Intents]

Jack, Andy wants to tell you wage growth expectations and insists they be included in forecasts. It is the only way he can mathematically figure out how to come up with a way to solve the nagging portability problem of defined benefit future salary increase on past service.

[exactuary]

And when DB plans were first designed, the lack of portability was considered a plus:

it made it expensive for ees to change jobs

it made the cost of retirement benefits cheaper for those who did not quit

__________________________________

CB plans are, on average, portable. The "interest" credits update the benefits about as fast as future pay increases in a final average plan.

Work for two final average plans for half career each --> get screwed

Work for two CB plans -- come out about same as full career with one CB plan

That is portability, by definition

[Andy Lang]

Since when did

a. 'portability become defined as a present value of accrued benefit problem, that leaves such values heavily backloaded; and

when did

b. salary scales have anything to do with it. A dollar per month benefit has heavily backloaded PVs. Check it out. And retirement subsidies are 100% tontine--meaning they can be taken away in ERISA, but only if you break other laws, like ADEA.

True, salary increase assumptions exacerbate it, but they do not cause it. It is caused by a poor definition of how to determine 'accrued benefits'.

Fix it and it does cost more. So what--it also fixes the problem and makes these systems what they should be--which is the greatest invention of the 20th century ,and very much needed today not just here but in the world.

Sometimes doing the right thing is also good for everyone--except people who want to deceive others of course, for personal gain.

John Nash got the Nobel Prize for that bit of insight, and so have others with similar ones.

And so will I, when you add in the simple idea that the assets belong to the plan participants, and by doing so, you can change the world by contraining global capitalism and furthering democracy, which BTW, is more greatly threatened today than at any time in history.

And that is in addition to saving Social Security, Medicare, and retiree medical plans, all of which are in great trouble because they are not actuarially sound--lacking actuarial advance funding and laws with teeth to protect the participants and the assets, and of course DB plans in private industry, which have all three major components, but alas that last one--laws--have been subverted by the inventors, or at least their successors, the pension actuaries.

They had help of course from the Vast Right Wing Conspiracy (VRWC) ,and the fact that the federal governmnet uses bad accounting, cash rather than accrual, has peremitted this to be hidden--or opague for so long.

Who would have though that the feds would not have changed to accrual accounting, which they have demanded from all other public entities, or that they have not applied the lessons learned from ERISA to themselves?

Check out my forum these days and see some of the folks in that last thing, the VRWC: http://clubs.yahoo.com/clubs/andylang.

Why by God, it includes the largest organization on earth and in the US--the Catholic Church--more than one billion of the former and 64 million of the latter.

The trap is gradually being set and the noose is being tightened with every day. Make sure you dont get caught too close to those within the VRWC, otherwise the Sherriff and the Hangman might mistake you for part of Them--and after all, I need you and so does AndyBert and even Captain Ahab--to slay the Great White Whale, or at least drive him beneath the ocean and to other oceans where he cannot bother us--at least until we forget he is there. You can't really kill the Great White Whale you know, any more than you can kill the Boogyman, or the Horny One.

Obfuscation and ignorance of the law will be no excuse when Armegeddon, The Day of Rapture and the Day of Judgement comes, as it surely will.

Ohhh---the Lord's vengeance will be mighty and awful and swift, Dudes and Dudettes, for tbose who have false gods before Him, who is the Alpha and the Omega the Beta and the Zeta, especially the God of Mammon.

[Intents]

Saying that plan assets belong to participants is paying tribute to Mammon in my Book. I say that because you get most of your attention these days from current participants, not those long since gone, and not those responsible for making sure benefits are paid.