It’s an Art Form

Running and serving a pension plan can be a challenging and delicate process. Experts at the 2022 ASPPA Annual Conference held at National Harbor, MD discussed some of the situations one can face in performing those functions. 

“It’s an art form, in a lot of respects,” Kevin Donovan, Managing Member, Pinnacle Plan Design LLC, remarked in “Pension ‘Penchants?’: DB for Non-Actuaries,” the workshop in which he discussed starting a new pension plan and the considerations that go into that. “There’s no magic bullet — we look at every situation as a unique one,” said Donovan of the services he and his firm provide in performing that function. 

Contributions

In considering annual contributions, investments and plan funding, said Donovan, one must look at the economics of the situation. “It all comes down to the economics,” he remarked. Regarding maximum funding amounts, Donovan told attendees that it is “really a matter of looking at what the end date is” and making a reasonable projection regarding what they will earn. 

Donovan offered other tips concerning contributions as well, and indicated they, too, are not always cut-and-dried. The following were among his observations: 

• Minimum contribution requirements (MRC) are calculated by determining the expected increase in benefits +/- the shortfall or excess of assets over liability. The shortfall is amortized over seven years, while the excess is fully recognized. 
• The MRC could be more than the salary credits for the year if the government-mandated interest rate is less than the interest crediting rate, and there are not enough excess assets. 
• The maximum deductible contributions (MDC) and the MRC are related in that they are, respectively, the ceiling and the floor for the contribution range for the year. 
• The assumptions generally are not the same for MDCs as they are for MRCs regarding interest rates; however, the other assumptions are the same. 
• Typically, the recommended contribution is the amount to fully provide benefits on a plan termination basis. The MRC can fluctuate based on assets, and the MDC can lead to overfunding. 

Investments

There is nuance to how much to invest in the plan as well, Donovan suggested. At the end of the day for a DB plan, he said, how one gets to the maximum limit is one of the “pieces of the puzzle.” 

A DB plan is where one wants the most conservative part of the portfolio, Donovan argued. He advocated not automatically investing just 3%; rather, he suggested investing in a way that will allow one to meet one’s saving goals. “Invest so you can get a good return with as little volatility as possible,” he said, adding that one should not be “too hung up on meeting the interest crediting rate.” 

Rules and Regs

In another Oct. 26 session, “Question ‘Air’: Your DB Questions Answered,” an expert panel indicated that compliance with regulations and laws also can be subject to interpretation and require judgment. Panelists included Jim Holland, Chief Research Actuary at Cheiron, Inc.; Norm Levinrad, Chief Actuary at EGPS; Karen Smith, President of Nova 401(k) Associates; and Chris Denning, an actuary with the Tax-Exempt/Government Entities Division of the IRS Office of Employee Plans and with the Office of Rulings and Agreement. 

For instance, Holland said that there is no hard and fast answer concerning the frequency with which cash balance plans can be amended. “It’s facts and circumstances,” he said; Denning remarked that he could not say anything definitive on the matter. Holland also said there could be a timing issue if there is a reduction in force involving half of the non-highly compensated employees. 

Donovan, too, touched on compliance and the uncertainty it can entail. He noted that changes in the business environment — factors outside plan sponsors’ control — can affect the permanence of a plan and the perception that it was intended to be so. He observed that under IRS guidance in Revenue Ruling 72-239, if a plan terminates within a few years after its initial adoption, the plan sponsor must give a valid business reason for the termination; if it does not, there will be a presumption that the plan was not intended to be permanent when it was started.