When creating a benefit illustration for a Plan Sponsor that has both a defined benefit and defined contribution plan (401(k) or 403(b) plan for example), it can be useful to include a defined contribution plan in the measurement of total benefits that are payable at retirement.

DB Precision and the portal provide components needed to offer such modeling capabilities. The setup of defined contribution modeling is built around the use of an Account Definition.

Furthermore, for a sponsor that is enabled on the PensionSoft Internet portal, users can enter information in order to do their own modeling using the portal's Benefit Calculation screen.

To set up a defined contribution plan, you should create an Account Definition as follows:

• Create New Account Definition: In DB Precision, open the Plan Document, right-click Account Definitions, and select Add from the resulting menu. Give the account a name, "AccountDC" for example.
• Set Account Type: For the Account Provision created when the definition was set up, double click that provision and change Account Type to either 401(k) Account or 403(b) Account. This is a critical step as this will cause the system to automatically apply limitations to account allocations.
• Set Interest Crediting: Change interest crediting to annual. While you could alternatively choose quarterly or monthly here, this can complicate checking with little gained for an illustration that is meant to be an estimate.
• Employee Contribution: You will need to add to the Account Provision an Account Transaction that represents the annual contribution by employees. To do this, press the Add button under Transactions and double click the newly created item.
  
  Give the item a name ("ContribEE" for example), and set the Type equal to Employee 401(k)/403(b) Deposit. If the amount contributed to the plan each year is reported, you will need to have a Reported Amount that you then choose on this screen. More commonly though you will set this amount to be equal to a formula.
• Employee Contribution Formula Service Definition: To code your employee contribution to be equal to a formula, you need to know when employees can first contribute to the defined contribution plan. You will then need to set up a Service Definition that includes these requirements for defined contribution eligibility (if not already created). If there are not any restrictions as to when an employee can first contribute, you will need to make sure that you have a Service Definition that simply begins accrual on hire date.
• Employee Contribution Formula Reported Amount: For the formula, contributions are generally a function of earnings/pay. For this purpose, make sure that you have a Reported Amount that reflects pay upon which employees will contribute and make sure that a Reported Amount lookup has been created for this amount.
• Employee Contribution Formula: On the Acccount Transaction screen under Regular Deposits Defined by Formula, select the above-described Service Definition for Service Name, and then choose a Deposit Frequency of Annually and a Deposit Anniversary of 12 and 31. Most defined contributions made to a plan for an employee equal a percentage/fraction of that employee's pay. That fraction can either be a Reported Amount if reported by the sponsor, or can be chosen at time of calculation by using the operand DCRATE.
  
  For example, if the contribution is to be entered when a calculation is run and the Reported Amount lookup is called lookup_Earnings, your formula might simply equal "DCRate * lookup_Earnings". Once entered, press Ok on the transactions screen.
• Employer Contribution: You will also need to add to the Account Provision an amount that represent the employer contribution to the plan. For this, under Transactions on the Account Provision screen, press the Add button and double-click the newly created item.
  
  Give the item a name ("ContribER" for example) and set the Type equal to Employer 401(k)/403(b) Deposit. For a formula-based allocation (standard unless actually reported by the sponsor), use the same Service Name, Deposit Frequency (Annually), and Deposit Anniversary (12 and 31) as was used for the employee contribution above.
  
  For the formula, this too is generally a function of an employee's earnings/pay, the rate contributed by the employee, and subject to some limit (example "MIN(0.5*DCRATE, 0.03)*lookup_Earnings")

For defined contribution plans, there are two options for setting an opening balance from which projected balances begin.

• Reported Amount: If the Plan Sponsor is providing an opening balance at some frequency (once per year or every quarter for example), you will need to add this amount as a Reported Amount for the sponsor and import balances. Then you will need to modify the defined contribution Account Provision as follows: 1) add a transaction to the Account Provision, 2) double-click the transaction to edit, 3) name the transaction ("OpeningBal" for example), 4) check the box Deposits defined by a Reported Amount, 5) choose the Reported Amount name that represents the opening balance (reported by the sponsor), 6) set the Type for the transaction equal to Opening Balance (pre-tax).
• User Reported: If the balance will be reported by the user at time of calculation, open the Account Definition screen and check the box Start with Defined Contribution balance specified by User.

There may be situations where you would like to convert the defined contribution plan balance to an annual benefit. To do this, you will simply be dividing the balance at annuity commencement date by an Annuity Factor Definition using a form of payment equal to the plan's single normal form of payment and under current market conditions. If your plan has a lump sum or small benefit cashout option, you likely already have such an Annuity Factor Definition and can skip the first two steps of the following:

• Create Actuarial Equivalence Definition: 1) Right-click Actuarial Equivalence Definitions in the Plan Document and select Add from the menu, 2) name the item ("AEQ_DC" for example), 3) double-click the provision of the item to edit, 4) for Participant Mortality Table, choose [Floating IRC - 417(e)(3)], 5) for Interest Rate Type, choose Variable Rate, 6) for Rate Levels by Age, choose PPA Segment Rates.
• Create Annuity Factor: 1) Right-click Annuity Factors in the Plan Document and select Add from the menu, 2) name the item ("annFactor_DC" for example), 3) double-click the item to edit, 4) for Actuarial Equivalence Definition Name choose the definition created above, 5) for Factor Measurement Date, choose Annuity Commencement Date, 6) press the Choose and choose the single normal form of payment for the plan.
• Create Formula Derived Item as Converted Benefit:1) Right-click Formula Derived Items and choose Add from the menu, 2) name the item ("benefitAnnual_DC" for example) 3) double-click the item to edit and set the Formula as the defined contribution Account Definition divided by the Annuity Factor Definition just created ("AccountDC / annFactor_DC" for example), 4) change the Round Type to Nearest, and Round Unit to 0.01.

If these defined contribution plan amounts are to be accessible on the portal, you will need to add or modify and Export Definition for this purpose. You will need to add one or more of the items created in this help topic to the items list of the export. Once done, you will need to double-click the Export Definition name in the Plan Document to edit, choose the Internet tab, and then do the following. Once you are done making these modifications, test by running the export on the Benefit Calculation screen on the portal.

• DC Items: Check the box Display DC Items
• Opening Balance: If users will be entering their own opening balances for the defined contribution plan, check the box Request Opening DC Balance.