The only way to pass a TIAA-CREF account beyond the current generation requires that you elect not to annuitize. You must instead elect the Minimum Distribution Option, because that avoids the conversion of the account into a premium. The first benefit, assuming that this comports with your values and resources, is that you will have responsibility for your own financial destiny. To underline the point, you have rejected the safety net of a lifetime annuity and have chosen instead to take distributions at your own pace, subject to the governmentally prescribed minimum. (more…)

Single life annuity—or “One-Life Annuity,” as it is called in TIAA-CREF’s documentation—guarantees that you will have income for the rest of your life. Given the size of the monthly payment, it benefits those who have not had an opportunity to accumulate large retirement accounts and run the risk of outliving their assets. The one-life alternative seems obviously appropriate for single people who either do not wish or are not in a position to pass retirement assets on to heirs or charity. They also do not have another person for whom they want to provide an income after their death. (more…)

In developing a retirement plan there are several factors to consider in addition to the amount you need or want to save.

1. Income Taxes.

The above discussion did not take into consideration income taxes. You might have to save more if you have to pay income taxes on all or part of your retirement benefit or your contributions. Distributions from qualified employer plans are always subject to retirement income tax. (more…)

The treatment of investment risk in corporate pension plans probably is the least satisfactory area in the establishment of investment objectives. In spite of all the work published on risk in the investment literature of the past several years, risk tolerance often is not specified in setting investment objectives. Sometimes, statements of risk are made in general terms (e.g., the fund should not suffer a loss in any designated period) or a maximum tolerable decline in asset value is specified. Such specifications of risk are very difficult for an investment manager to deal with. (more…)

Although practices may differ with respect to the involvement of the corporate sponsor in objective setting and asset allocation retirement, selection of investment managers is rarely delegated. In terms of dollars of assets, most funds are managed by investment managers outside of the corporation, inasmuch as few companies have the internal expert staff needed to perform this function. Moreover, corporate management may prefer to delegate the fiduciary responsibility for investment, and some companies believe that having outside managers reduces some of the problems with respect to pensions in labor negotiations. (more…)

This is usually referred to as the actuarial accrued liability. It is that portion of the actuarial present value of all future benefits (PVFB) that is assigned by the actuarial method to the period prior to the valuation date. present value of all future benefits is the present value of all benefits accrued and unaccrued, past and future. It is a measure of the total obligations of the plan, past and future. That portion assigned to the past is called the actuarial accrued liability. This concept will be discussed again later in the section on actuarial methods. Due to the wide variety of actuarial methods in use, the same plan and assumptions can generate Significantly different actuarial accrued liabilities. In fact, one commonly used method (Aggregate Actuarial Cost) produces a zero actuarial accrued liability by definition. It funds costs over future payrolls only. (more…)

There are two traditional ways to value pension plan assets, i.e., market value and book value (cost). The actuary has always been skeptical about using market value due to the frequency of large short-term swings in security prices. In order to use market value properly, the actuary should value the liabilities at market also, which implies changing the interest rate assumption each year to meet the changing condition of the securities marketplace. This approach is, in fact, what is encouraged by FASB No. 35, which requires market value of assets to be used for disclosure purposes. There is an illusion of accuracy connected with market values because of the assumption that securities could be converted to cash at published prices. In fact, it is questionable whether any large fund could be liquidated with rapidity and if many tried to do so simultaneously, the entire securities market would collapse. (more…)

The conventional approach to pension asset management and asset allocation in retirement assumes that one pool of invested pension assets should be regarded as a single portfolio (although possibly with multiple investment managers) having a single level of risk tolerance and acting as an offset to a single pool of pension liabilities. However, the estimated magnitude of the pension liabilities is something less than precise and establishing investment objectives to meet such an uncertain target is not easy. Some corporations have met this problem by making distinctions among the liabilities and offsetting each pool of liabilities with a separate portfolio with appropriate risk and return objectives. (more…)

Employer-sponsored defined benefit pension plans in which the benefit is defined by account value rather than monthly lifetime retirement income. Cash balance plans are often referred to as “hybrids” because they have some of the characteristics of traditional “defined benefit” (DB) pension plans and some of the characteristics of “defined contribution” (DC) plans, such as 401(k). In general, traditional defined benefit plans promise qualified employees an income benefit for life (or some other period) starting at “normal retirement age,” without regard to how much (or little) the employer must contribute to the plan to fund the benefit. Defined contribution plans, on the other hand, promise only how much the employer will contribute to a qualified employee’s account from time to time until the employee retires but they make no promises with regard to investment earnings or results, let alone a monthly income benefit for life. (more…)

In the late 1980s, the U.S. Department of Labor’s Bureau of Labor Statistics (BLS), the government agency that calculates the Consumer Price Index, was directed by Congress to calculate an experimental Consumer Price Index for the Elderly (CPI E). This experimental index for Americans 62 years old and older is based on existing data, re-weighted to reflect expenditure patterns in the older population. A comparison with published CPIs found that older adults experienced a higher rate of inflation from 1983 through 1999 than the rates reported for either the CPI W or the CPI U. However, it is important to remember that the Consumer Price Index for the Elderly is an experimental index and is not regularly published by the BLS. (more…)