Friday, April 10, 2009

Mutual Fund Incubation

Establishing a minimum required track record of at least 3 years along with setting a minimum asset requirement can help investment fiduciaries avoid the potentially misleading effects of mutual fund incubation.

Tuesday, April 07, 2009

Defined Benefit Plans - Modest Relief in 2009

Market turmoil over the last year has severely impacted DB plan funding levels and future funding obligations. While plan sponsors can t directly control interest rates or capital market performance, they can influence funding requirements via plan actuarial assumptions. Recent legislation and regulatory guidance provides additional flexibility in this area.

Liability Discount Rates: new IRS guidance allows plans to change their yield curve election in 2009 without IRS approval. Plan sponsors that choose to use the corporate bond yield curve in lieu of segment rates may use the same look-back period ( 4 months preceding January 2009 for a calendar year plan) that is allowed for plans selecting segment rates. This would allow plan sponsors to use discount rates that could be up to 1% higher than those allowed without the look back provision and in lieu of the segment rates. The IRS has not indicated whether another election will be allowed in 2010 so the use of a current yield method could introduce higher future volatility in plan funding requirements.

Asset Smoothing : the IRS provided additional guidance (Notice 2009-22)on how asset smoothing, allowed under the Worker, Retiree, and Employer Recovery Act of 2008, could be implemented. This guidance is particularly valuable given large recent asset losses. The notice provides automatic approval for a change in asset valuation methods for plan years beginning in 2009.

Adopting actuarial assumptions which reduce long term funding volatility while providing a beneficial current impact seem to be a win-win for plan sponsors. Adopting an asset smoothing methodology seems to be an easy decision while the benefits of adopting a corporate bond yield are not as straightforward. Each case should be determined in consultation with your plan actuary.