Fmm: jdTrey,kameni~millimanIaom [mal~j~~,lcameni~rnillimn.mml 

Sent: Tuesday, kbmry 16,2010 4:42 PM 

TO: EBSA, E-ORI - EBSA 

Subject: Department of Labor- RFI Regarding tlfetlrne Imme Optlons for Partld pants and 

Beneficiaries in Rimmnt Plans - RIN 1210-AB ;p~i#~~

,,A #*.+ *.,: 'tgpq9 s,!22;p~, 

In respmse to the above RFI, I am providing below a cupy of an article written by me that was published 

last year. The article is entitled "How to Make Defined Benefit Pension Plms Atlractive to 2 1st CmtrPy 

In gmd, the article is about a WbIe new type of dehed benefit paion pIan system hat emploprs 

might consider sponsoring since it is designed to minimhe mual cost volatility and haw much simpla 

rules than the cment system. The eble new system is gmed completely toward providing pdcipants 

with a lifetime mmthly pension iaoome payable My from a Mned bdt paasioa plan. 

I believe the article addresses question B. 14 of tfit RFI and touchas on various other RFI questions. 

Please keep in mind hat the article represents my ideas and opinions and does not repreant the ih ad 

Jefhay R. Kamenir, AS& M&U& EA 

Conwking Actuary 

Ern* Benefits 

Here you go. 

Be 

Subjed RE Autbu mpy'of Jeff Ramrdr article 
Hi Jeremy - 

Here you go. Call on me at any time if I can be of assistance. Have a 

great evening. 

Sandra L. Becker, CEBS 

Director of Operations 

CEBS Program and ISCEBS 

(262) 373-7670 1 (262) 786-8650 Fax 

P.O. Box 1270 

Brookfield, WI 53008-1270 

From: Jeremy Engdahl-Johnson [mailto:jeremy.engdahljohnson@milliman.com] 

Sent: Thursday, May 28, 2009 5:48 PM 

To: Sandy ~ecker - 

Subject: RE: Author copy of Jeff Kamenir article 

Great. Thanks, Sandy. 

Jeremy 

Sandy Becker <Sandyb@ifebp.org> 

05/28/2009 06:28 PM 

To 

Jeremy Engdahl-Johnson <jeremy.engdahl-johnsonBmi1lirnanncom> 

CC 

Subject 

RE: Author copy of Jeff Karnenir article 

Hi Jeremy 

We'll get it made up and send it out to you Friday or Monday. 

Thanks 

Sandra L. Becker, CEBS 

Director of Operations 

CEBS Program and ISCEBS 

(262) 373-7670 1 (262) 786-8650 Fax 

P.O. Box 1270 

Brookfield, WI 53008-1270 

From: Jeremy Engdahl-Johnson [mailto:jeremy.engdahljohnson@milliman.com] 

Sent: Thursday, May 28, 2009 12:24 PM 

To: Sandy Becker 

Cc: Jeffrey Kamenir 

Subject: Author copy of Jeff Kamenir article 
Sandy, 

Is it possible to get a PDF of Jeffrey Kamenir's article, "How to make 

defined benefit plans attractive to 21st Century employees?" 

Thanks for your help, 

Jeremy 

Jeremy Engdahl-Johnson 

Managing Editor and Public Affairs Deputy 

Milliman 

One Pennsylvania Plaza, 38 th Floor 

New York, NY 10119 

646.473.3021 

jeremy-engdahl-johnson@millirnan.com 

This communication is intended solely for the addressee and is 

confidential. If you are not the intended recipient, any disclosure, 

copying, distribution or any action taken or omitted to be taken in 

reliance on it, is prohibited and may be unlawful. Unless indicated 

to the contrary: it does not constitute professional advice or opinions 

upon which reliance may be made by the addressee or any other party, 

and it should be considered to be a work in progress. Unless otherwise 

noted in this email or its attachments, this communication does not 

form 

a Statement of Actuarial Opinion under American Academy of Actuaries 

guidelines. 

....................................................................... 

This communication is intended solely for the addressee and is 

confidential. If you are not the intended recipient, any disclosure, 

copying, distribution or any action taken or omitted to be taken in 

reliance on it, is prohibited and may be unlawful. Unless indicated 

to the contrary: it does not constitute professional advice or opinions 

upon which reliance may be made by the addressee or any other party, 

and it should be considered to be a work in progress. Unless otherwise 

noted in this email or its attachments, this communication does not 

form 

a Statement of Actuarial Opinion under American Academy of Actuaries 

guidelines. 

***i t** **********************f******************************** 

Ttii mrnunkatlon Is intended soiely fa the addressee and is 

corrRdentiat. If you are nat the Intended rscipient, any dt9dosurs, 

oopybg, distribution or any dlan Wen or omitted to b taken in 

reliance cm 1, is prohied and may be unlawful. Unless indicated 

to the cantmy: #does nu caratikne profWonat ad- w 

oplrrlm upon which relhnce may be mad0 by the, addrtmsee or any 

other party, and it should be considered to be a work in prcgress. mfllt*ftfmftmlnmntftm~ntmfthmnmnmn~w*-~n+n~-m-n*~* 
b Defined Benefit Plans I 

How to Make Defined 

Benefit Pension Plans 

Attractive to 21st Century 

Employers 

by Jeffrey R. Kamanir 

It is highly unlikely that many new defined benefit (DB) plans will be established under the current DB plan system, which is unfortunate given a DB 

plan's ability to provide retirees with predictable retirement income that will 

not run out. This article provides a blueprint for what could be a sustainable 

new 08 plan system. The goal is to devise a new Dl3 plan that will experience 

less cost volatility, the hope being that if plan sponsors know that casts will 

be stabte from year to year, they may be more inclined to sponsor a DB plan 

(or keep one going). 

he main reason many companies no Benefits Under New DB Plan System and Current 

langer whh to sponsor de&d bene- DB Plan System.") 

Kt (DB) pension plans, or establish Nevertheless, companies might accept this tradenew ones, is the year-to-yeas cmt wl- off in exchange for mucb greater cost stability and a 

aaty they present. hgeiy, titis vola- major simplification of the rules govexning DB plans. 

rility is caused by two variable& The 

first is the un~rdkhbIe nature of an- PROPOSED NEW DB PUN SYSTEM nual investment performance. The 

other is the anpredictability of TIM new DB plan structure proposed hdre would 

changes in the long-term intcres t be based on the following "big picture" rules: 

rates used to value plan liabilitieaThe DB plan swc- 1. Plan sponsor cuntributions would be invested 

ture proposed here would address both of these in vehkks such a9 money market accountq where the 

source$ of uncertainty anql resulting mt volatility. principal value is designed to remain stable. 

Implicit in this new DB system is the idea that 2 'Ihe value of all plan liabilities would be skuplan sponsors would have to expect a lower invmt- lated using a mandated stable asset-type interest rate 

ment return on asse& wwhichia turn would mean that assumption published by the Internal Revenue Serhigher contributions would be required andlor lower vice (IRS). 

benefits provided when compared with the cumnt 3. Minimum required contributions would be 

DB system. (See sidebar: "Comparison of Cwrtg and annually determined, based on the sum of any ua- 

- - 
COMPARISON OF COSTS AND BENEFITS UNDER NEW DB PLAN SYSTEM 

AND CURRENT El8 PLAN SYSTEM 

An employee hired at the age of 45 immediately begins participation in a DB plan under the current system. 

The plan's investment allocation of stocks and bnds is expected to result in an annual investment return of 

7.5%.The plan provides an annual lifetime benefit payable beginning at the age of 65 based on a formula of 

3% of pay for each year worked. If the empIoyee works until the age of 65 and has an average annual pay 

of $50,000, the employee's mud Metime benefit bewing at the age of 65 is equal to $30,000 (i.e., 3% X 

$50,000 X 20 years). Based oo the plan's expected investment return, the company will need to contribute 

about $6,000 per year for 20 years to fully fund the benefit when it starts at the age of 65. 

Under the new DB plan system, the plan's investments are all allocated instead to stable assets, such as 

money market accounts, which are expected to earn an amual investment return of 4%. Based on this 

lower expected investment return, the company will need to contribute instead about $lZ,MW) per year for 

20 years to fully fund the same $30.000 annual lifetime benefit commencing at the age of 65. Alternatively, 

if the company wants to contribute only $6,000 per year for 20 years, the employee's annual lifetime benefit beginning at the age of 65 would be equal to $15,000 based on a reduced formula of 1.5% x pay for 

each year worked. 

Atthough the current DB plan system in this example is expected tb produce either greater benefits for 

the same cost or the same benefits for lower costs, the trade-off is that the company will be exposed to 

much more annual cost volatility due to the more a-ive investment allocation. Under tbe current DB 

system, the company's periodic problem is that some years the "expected" investment return does not 

materialize, or might even be a loss. Then the company has to figure our. how to make up the difference. 

funded accrued-to-date liability and the liabilily expected ta be aecnted in the coming year. 

4. Minimum required contributions would not 

need to be paid irz quarterly installments. 

5. All plan. sponsor contributions would become 

part of the plan's assets and would be fully deductible, including any eontribu tions over and above the 

minimum required contribution. 

6. Unfunded accrued-todate liabilities would be 

determined based an the market value of assets 

7. Pension expense for accounting purposes 

would be equal to contributions made with no Purther balance shet dhciosure required. 

8. Plm benefits would not be insured by the federa1 government, so Pension Benefit Guaranty &rporatian (PBGC) premium payments would no longer be required. 

9. GI plan benefits would be paid as monthly 

annuities. 

10. The plan sponsor would select the plan design 

desired, subject to current nondlctimination. testing 

rules. 

11. Contributions would continue to be reported 

on IRS firm 5500. 

Table I summarizes what the general dWerences 

would be between this proposed new DB plan system 

and the current DB plan system. 

TRANSITIOM OPTION 

FOR EXISTING DB PLANS 

At1 existing DB plans would have the option to 

convert to the new DB plan sysbm by transferring 

all plan assets into an investment vehicle that cannot 

lose principal and fully hnding the plan's unfunded 

accxued-todate liabilities at the date of Bansition. 

COMPARING DB PLANS TO MONTHLY 

ANNUITIES OFFERED BY DEF~~JED 

CONTR~BUT~ON PLANS 

Although it is possible (or required in certain plan 

designs) to offer monthly annuities as payout options 

in a DC plan, it is much more difficuIt to do so than 

in a DB plan. If account balances are converted to 

monthly annuities within a DC plan (i-e., without 

purchasing an annuity), it is possible that a participant can outlive the account balance, resulting in the 

monthly annuity eventually becoming equal to $0. If 

account balances were converted to monthly anmui- 
TABLE I LICIII no r 

Ro~NewDBplp.Sydem &mt DB Plm System 

Mmdated investment allccations to slable mt Investment allocation, determined by plan 

fu- such as momy market a~co~ntg with fow risk sponsor (typically a mix of stocks and bonds), 

of loss of principal can lose principal with unpredictable 

and volatile invesbncnt performance. 

Mandated interest rate asumption used to dewmine Mandated intemt rate assumption used 

liabilities, annually updated, based on stable to detcnninc liabilitk annually updated, based 

asset inkrest rates (a&. money market amunts) on corporate bond interest mks - 

Proposed mks same as current rules, which b Mandated mortality rate assumption used 

require more recent mortality tables to be used to to determine liabilities, annually updated. 

vaiue liabilities but allow aU other assumptions All other actuarial asumptioas (t.g, salary 

to be based on a pian's particular demographic increase& bnnination, retirement, disability) - - 

experience 

Minimum required contribution annually equal 

to sum of urifunded liability to date (including any 

liability related to past semm in the iuitial 

actuarial valuation), plus liability expected to be 

accrued in the following year.Tbis iri more likely to 

result in a plan being fully funded, which 

. ~ 

are selected by the emIled actuary. 

Minimurn required contribution annually equal 

to seven-year amortization of unfunded liability 

to date, plus liability expected to be aocrued in 

Following year.This is less likely lo result in a plan 

being fully funded. which makes annual wntribution 

volatility more likely. 

minimizes annual contribution volatility. 

Minimum required contribution is payable Minimum required wntribution is payable 

by the end of the plan year, in four quarterly installments with a final payment 

due by Mmonths after the end of the plan year.This 

payment system can be confusing to plan spollsom 

due to complex rules governing quamrly contribution 

Funding palr than the minimum required Funding greater lhan the minimum 

contribution is always included in plan awts required contribution is considered a 

without any negative consequence& "credit balance" that can tw used to reduce future 

minimum required contributions However, 

complicated rules require the "credit balance" be 

excluded kom plan assets in many circumstances 

which can result in a plan being considered less 

funded and subject to additional compliance 

requirements. 

All contributions are fully deductible, which gives Contributions subject to maximum 

plan sponsors maximum flexibility. FVqmsed excess deductible limit, which can result in a plan 

asset rules are the same as the current rules which sponsor contributingan amount less than 

am designed lo discourage employers from wing dearid (although this is now likely to be less 

their taa situation. ofa concern because recent legislation is 

expected to increase the maximum deductible limit). 

 assets at plan termination are subject to 

regular and excise taxes. 

Unfunded liabilities are based on market value of Unfunded Liabilities can be b&d on 

assets, which remits in any small investment 1~~ "smoothed assets" which can delay funding 

being immediatslv funded. of any investment I~ws. 
results in a stable company balance sheet due to with an amunting'standard that may result I 

there beinn no differences behveen mnsion ex~ense in annml comvanv balance sheel volatilitv due 

the annual company balancc sheet. iiies are annually disclosed in accordance with ar 

accounting 

annual commnv 

standard, 

balance 

which 

sheet 

further 

volatility. 

increases - 

special filings are requikd. maioritv of dan benefits in the event of a fundim 

premium paymen& since there is little chance of 

Benefit Guaranty Gorpowtion. I 

AU benefits paid as monthly lifetime aanuities Retirement benefits can be paid as one-time hmam 

would be !'actuarially quivaient!' complicate plan administration).Tbis requires 

participants to make investment and distribution 

wkch req&es plan ipomrs to pi~ici~ants 

with complex "relative vaiuc" oomparisons for each 

higher paid participant% testing is not required. 

Proposed rules same as current rules, protecting Contributions annually reported oa IRS Form 5500 

participants by requiring Lhat an enrolled actuary certify and annual funding notice given to participants. 

annual minimum funding requirements are satisfied and 

to communiarte annually the funded status ofthe plan. 

Shce annual and liability values are not expected to Formal actuarial valuation is required annually. 

be volatile under the proposed rule& a formal actuarial 

valualion may not be mxcsary every year. 

I 

As with the current rules, plan sponsors have the option Plan sponsors have the option to pw on 

to purchase annuities from aa insurance carrier rather inveshenl and morlality risks to insurance carriers 

plan liabilities. assumptions used to value plan liabilities 

I 
AN EXISTING DB PLAN WmH ELEMiENTS OF THE PROPOSED NEW DB PLAN SYST€M 

General Information on DB Pla 

Public sector DB plan established in 1974 

350 participants (225 active and 125 inactive) 

+ $16 million in assets 

100% of assets invested in stable insurance mmpauy vehQlc; 

Benefit formula generally 1.5% times ha1 average pay times yaars of service 

Normal retirement generally age 6: 

Early retirement generally age 60 

Early retirement benefit. "actuarially equivalent" to normal retirement benefits 

Various monthly forms of payment options are offered and are aU "actuarially equivalent." 

No lump-sum option is availabl 

No employee contributions are required. 

TABLE 11 

RMAMCIAL SUMMARY OF DB PLAN 

Previous Year Gross hded Ratio* A1 Contribution for Year 

Year Investment Re- Beginaiag of Year (% of PayroU)*** 

1994 6.89% 129% 9.1% 

1995 5.18 127 9.2 

19% 6.40 125 9.8 

1997 8.55 131 9.3 

1998 7.96 1 32 9.3 

1999 7.70 128 10.1 

2000 7.28 130** If .O 

2001 7.22 140** 9.8 

2002 7.00 142** 10.3 

2003 5.92 140* * 12.3 

2004 5.63 142 7.7 

2005 5.55 139** 11 .$ 

2006 5.97 131 12.2 

2007 5.55 130** 14.3 

2008 5.41 121 14.9 

* Funded ratio is equal to the market value of assets divided by accrued-to-date liabilities 

Accrued-to-date liabilities were valued using a 7.5% interest rate for years 1994 through 

2005, a 7.0% interest rate for 2006 and 2007, and a 6.5% interest rate for 2008. 

** Reflects benefit improvements 

**+ For governmental accounting purposes, pension expense each year is equal to contributions 

made for each year. 
66 WHRm QU-LY, Second Qumr 

ties in a DC plan by annuity purchases, monthly benefit amounts would be subject to unpredictable burance carrier pricing. Plan sponsors would be 

responsible for ensuring that the chosen carrier is unlikely to default on the monthly benefit contract with 

the participant. 

Assuming a plan sponsor is willing to provide a 

monthly annuity option within a DCphqdespite the 

possible adrninistra tive issues mentioned above, it 

could provide a monthly annuity similar to that provided under the proposed new DB plan system. The 

company would have to be willing to assume investmeat responsibility for the account balances and invest the money in similar stable asset vehicles However, in today's DC plan world, many companies 

prefer to give participants the investment responsibaty for their account balanceg Many participants 

prefer to make their own investment decisions, opting for a lump-sum distribution rather than a monthly 

annuity. 

It therefore seems unlikely that a company would 

desig~ a DC plan to be similar to the new DB plan 

proposed here. A more feasible possibility for cornpaniss desiring to control cost volatility and still pmvide some type of retirement "safety net" to paxricipants via a monthly anmi$ might be to adopt the 

proptmxl new DB plan as a supplemental benefit to 

a primary DC plan. 

AN EXiSTING b6 PLAN WITH 

ELEWEUTS OF lW€ PROPOSehD 

NEW M PLAN SYSTEM 

The author has been a consulting actuary for 

nearly 15 years for an existing DB pbn that has elemeats of the proposed new DB plan system. (See 

sidebar: "An Existing DB PLan With Elements of the 

Propased New DB Plan System.") This pian is an example of how it is possible to achieve cost stability 

while aIso providing meaningful benefits to plan participants and maintaining a strong funded status. Because the plan is in the public sector, it is not burdened by complex rules that inhibit funding and plan 

administration, nor by accounting requhments that 

produce pension expenses that differ from actua! 

funding. 

It is possible to implement some of the proposed 

DB plan system concepts under the current private 

sector DB plan system, such as allocations to more 

stable investment Jternatks and adoption of a contribution policy that annually results in a well-funded 

position, However, for the proposed system to become a teality, the balance of the system's ideas 

woutd require ruIe changes to the current system. 

CO~CL~~ON !+;i: 

Under the current DB plan system, it is highly unlikely that many new DB plans (otber than perhaps 

'ct8x~helter" plans for small profesiiond groups) will 

be established. Many plan sponsors would like to 

avoid being eubjadtd to the yearly cost vo1aliliLy that 

comes from unpdicbk annual investment performance and long-term interest rate variance. As a result, the DC r&rement plan has been the wave of the 

mat past and present. 

However. if a new type of simple DB plan system, 

such as the one proposed in this art.icle,couM be created via a fresh pension legislative initiative and ap 

proved by the group in charge of pension accounting 

standards, it would go a long way toward again making DB plans a viable alternative for employers.The 

author believes that the continued survival o E DB 

plans is extremely important, given a DB plan's ability to provide retirees with predictable retirement 

income that will not run out, even when a retiree has 

the good fortune to live a long life. 4 

b THE AUTHOR 

JsftW R. Kamdr has 25 years of experience 

in consulting with clients on a wide range of retiremeat benefit issues including plan design, 

funding, accounting, compliance and communicationa He has extensive experience dealing 

with various issues rela ted to defined benefit 

plans Umenir's consulting experience includes 

actuarial valuations, metiliability forecasts, benefit change studies, plan terminations, compliance with nondiscrimination requirements and 

funding policy development. 

Intematloml $oclaty of Cedifled Employee B4neflt Speclalilrta 

Reprodd from the Second Quarter 2009 issue of BENEFTS QUARTERLY, published by the In term tioml Society of 

Certified Employee Benefit Specialkk With the exception of official Society announcernentg the opinions given in articles 

are those of the authors.Tbe International Satiety of Certified Employee Benefit Specialists disclaims responsibility for 

views expressed d statements made in articles published. No fWbr transmission or electronic distribution of this material 

is permitted without permission. Subscriptiaa information can be found at warar.kmbsorg. 

6XZ009 lnlemational Mry of Certified EmpIoyee Benefit Special%@