Company Addresses Interest Crediting Rate Issues Under Proposed Hybrid Retirement Plan Regs

Reference: Additional Rules Regarding Hybrid Retirement Plans Notice of Proposed Rulemaking

As the sponsor of a cash balance plan that covers 200,000 of our company's current and former employees, The Boeing Company appreciates the opportunity to provide comments on the proposed additional rules regarding hybrid retirement plans.

The Pension Protection Act of 2006 requires the IRS and Department of Treasury to develop regulations to ensure that all hybrid plans, in their many forms, would meet the new requirements of the Act. The combination of the recently issued final regulations and the referenced proposed regulations provide a solid guideline that addresses the many varieties of hybrid plans that now exist. However, we respectfully submit comments below regarding two areas of concern with the guidelines: (1) determining the maximum permitted fixed and minimum interest crediting rates and (2) possible approaches to providing 411 (d)(6) protection for required interest crediting changes.

Determining the maximum permitted fixed and minimum interest crediting rates

The principal and interest crediting rates in a hybrid plan are among the most important provisions that participants use in planning for their retirement. Hybrid plans with age- or service-based principal credits tend to provide benefits that are proportionately larger for older and longer service participants. The regulations may require many such plans to reduce their fixed/minimum rates, which then would likely result in a change to benefit accruals that would favor the younger employees (or disadvantage the older participants) to meet back-loading rules. This seems counter to the regulation's intent.

The use of the proposed conservatively low rates (5% fixed and 4%/3% minimums) means that the rates do not reflect recent history or foreseeable expectations. Based on the range of returns of the last decade, a fixed rate of 5.5% or even 6% could be reasonably supported, especially if the additional safeguard described below were added. The same argument could be made for raising the two minimum rates. If the concern is that a higher fixed or minimum rate might be too high in the future, we suggest an alternative below.

We understand that even though the US economy in recent history has not seen a period of prolonged low interest rates where the long term corporate bond yields are well below 5%, such a situation could occur in the future. We also understand that the regulations are intended to endure indefinitely and accommodate unforeseen situations. Furthermore, although the conservatively low rates reduce the chance that those rates will be significantly higher than prevailing market rates in the future, such a chance still exists.

We suggest that the fixed and minimum rates remain "fixed" for a reasonably long period of time, but not indefinitely, thereby satisfying the Congressional mandate for fixed and permissible minimum rates. Perhaps one could define the terms for the fixed and minimum rates to be for a long fixed period, for instance 5 years, rather than for an indeterminate amount of time. The rates could then be changed if the "true market rate", that is, the third segment as specified in the regulation section 1.411(b)(5)-1(d)(3), dips below the fixed and minimum rates by an amount such that the fixed and minimum rates are no longer reasonable. Such an approach would introduce flexibility that protects plans and avoids prolonged windfalls to younger participants at the expense of older participants, even when economic circumstances differ substantially from today's environment. In an era of prolonged very low interest rates, when interest rates such as 5, 4 and 3% appear unreasonably high, the economy will likely be experiencing other significant issues, and plan sponsors will review their plan designs for a variety of reasons.

Brief fluctuations in the long-term interest rates, where the third segment rate drops below the fixed and minimum rates for a brief period of time, are of less concern. Most pension plans have long time horizons, and a year or two of minimum or fixed rates that exceed prevailing market rates likely would not benefit the younger participants disproportionately. For fixed rate plans where the rate is usually lower than prevailing rates, a temporary inversion means that the benefits earned for that time period will possibly exceed benefits earned in other plans where those plans credit interest based on the market. However, for most years, the reverse would be true, and the market based plans would provide higher credits. The same argument would apply to a plan with a minimum rate as long as the market-based rate that is an alternative to the minimum (e.g., Treasury bonds) is not a rate that equals a maximum permitted market rate. Even if the minimum rate is paired with a maximum permitted market rate, as long as the inversion is short term, the plan would probably not benefit young participants excessively. In that instance, all participants would benefit to some degree from the higher interest credit, and a higher minimum would permit plans to offer a higher degree; of age-and service-based principal credits without violating the accrual rules.

If the fixed and minimum rates remain at the conservatively low levels suggested in the regulations, many plans will have to adjust their formulas and provide proportionately more principal credits to younger and lower service employees (or lower contribution/principal credits for older participants), a contradiction of the regulation's goal that younger employees should not benefit disproportionately.

Moving away from a fixed or minimum rate for interest crediting would also make it more difficult for participants to plan for their retirement because market rates are inherently volatile.

Recent history shows that the proposed 5% is lower than any spot rate for high-quality long-term bonds in the past decade. A plan that provided a fixed 5% since 2000 would have had far fewer interest credits than a plan that was pegged to the third segment or even to most of the other corporate-bond-based safe harbors described in the final regulations. Again, based on the range of returns of the last decade, a fixed rate of 5.5% or even 6% could be reasonably supported, especially if the additional safeguard described above were added. The same argument could be made for the two minimum rates.

Possible approaches to providing 411(d)(6) protection for required interest crediting rate changes

The alternatives for converting from an impermissible to a permitted interest crediting rate that appear in the Comments and Public Hearing portion of the preamble are reasonable; however, it would be helpful to extend 411(d)(6) protection to as many of those alternatives as possible. In addition, we suggest that final regulations extend 411(d)(6) protection to plans that keep their current, soon-to-be-impermissible rates (assuming the regulations do not change as a result of comments) but bring their rates into compliance by overlaying a maximum rate, such as the third segment rate. Providing an overlay will ensure that the plan interest crediting rates are never too high, and in most cases, the participants' benefits are unlikely to change significantly.

Conclusion

The above comments are intended to minimize the disruptions, such as increases in principal credits for younger employees and decreases in principal credits for older employees, that many hybrid plans will experience by complying with the guidance described in the regulations. Any approach that minimizes disruption in plan design, and therefore increases the participants' ability to understand their benefit and plan for retirement, will be helpful to the sponsor, to the administrator, and most importantly, to the participants.