Crediting rate

Crediting rate

The interest rate offered on an investment type insurance policy.
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"Changing from a 30-year crediting rate to actual rate of return has worked for a lot of our clients to minimize risk," he says.
For example, if the plan sponsor hires a money manager who also guarantees the sponsor's book value and a crediting rate, the money manager could be making many investment decisions to protect himself or herself as the guarantor, rather than investing in the best interests of the plan.
Generally, the least expensive variation is a product that funds benefit payments through asset liquidation and then slowly amortizes gains and losses through the crediting rate.
Also, ask the provider for what-if scenarios to see how the crediting rate performs under various conditions.
Does the contract guarantee a true floor crediting rate, or is the portfolio simply forced into immunization when problems arise?
There are different ways to calculate crediting rates. The formulas have several variables, including interest rates, reset frequency and the portfolio yield.
About 70% of cash balance plan sponsors utilize a 30-year Treasury rate as the crediting rate for employees' accounts, and it changes annually just before the plan year begins to match the current market rate for 30-year Treasurys, Inglis says.
"Consequently, any interest crediting rate determined at the beginning of the year that exceeds one-year Treasury returns is essentially un-hedge-able."
"They allow sponsors to say, 'We will choose a crediting rate that is equal to an actual rate returned.' Seventy percent of our existing plans have adopted the new rates.
"Plan sponsors must continue to provide interest credits on the prior accruals that are at least as large as the interest crediting rate defined under the current plan," Hueffmeier explains.
"One of the ideas that inspired the cash balance plan design is that an employer can credit this low rate of interest and invest in equities, then outearn the crediting rate and reduce costs." The Vanguard paper says that "most of the risk in a cash balance plan is related to equity exposure, whereas a traditional plan is sensitive to interest rate movements." Says Austin, "With a cash balance plan, once sponsors establish the crediting rate, the focus becomes, what is the proper asset allocation, and how much risk are they willing to take to outperform the crediting rate, or not?"
Cash balance plans often invest in a combination of cash and somewhat riskier assets like equities with the aim of making up the difference between cash rates (one-year T-bills) and the plans' interest crediting rate (equal to the 30-year Treasury yield), Hueffmeier says.