QUESTION: How do I model a market-based cash balance plan in ProVal?

ANSWER: Market-based cash balance plans are handled in much the same way as traditional cash Balance plans.

The Benefit Definition for your market-based cash balance plan should be the maximum of two cash balance benefit formula components:

• The first will use the expected return on plan assets as the interest crediting rate in Valuation Assumptions.
• The second will use a constant 0% interest crediting rate. This will return the sum of pay credits for each participant. Note this piece can also be a career average benefit formula component.

Valuing the benefit as the maximum of these components will prevent the benefit paid from falling below the minimum allowed under Secure Act 2.0.

When running a forecast, it is important that the projection assumptions used in your core projection are defined appropriately for a market-based cash balance plan. Specifically, the experience interest crediting rate for your cash balance benefit components must be set to vary with the Alternate Benchmark (not inflation). The low, medium, and high alternate benchmark interpolation points should be set with the range of asset return in mind. For each applicable cash balance benefit component, define the experience crediting rate to be used at the interpolation points, usually exactly equal to the interpolation points but that can vary depending on your plan. Since interest crediting is based on plan return rather than the bond yields used by traditional cash balance plans, you likely want to use a wider set of interpolation points. Setting too narrow a range can impact the accuracy in interpolation when plan return falls far outside that narrow range. For example, if your plan has an expected return on assets of 6%, setting the low, medium, and high alternate benchmark interpolation points as 0.04, 0.06, 0.08 respectively may lead to flawed results when plan return is negative in your forecast. Refer to the Technical Reference article Interpolation of a Core Projection's results  for details on ProVal’s interpolation methodology.

For stochastic forecasts, you will tie the alternate benchmark to your plan return by including an asset class in your Capital Market Simulation that consists of the nominal annual return for each year and trial. This asset class can be a proxy, if desired. Otherwise, this can be approximated using ProVal by running a stochastic forecast, saving out trial detail for investment return, and then appending that output to your Capital Market Simulation as a new asset class. (Note if using the cumulative return, you need to annualize the returns in Excel before appending to your CMS).

In your stochastic assumptions, select the updated Capital Market Simulation, and in the Benchmark Yields topic, select the asset return class from above from the Alternate Benchmark based on dropdown. This tells ProVal to use those returns when calculating the experience interest crediting rate in your forecast. You can further refine your experience interest crediting rate using the optional parameters on the screen to: apply a spread (e.g. -0.01 if actual crediting is defined as 100 basis points under plan return), minimum (e.g. 0 if actual crediting can’t fall below 0), and/or maximum (e.g. actual crediting capped at 10% per year).