I hear that my plan has an interest crediting rate of 4-5%. What does this mean and how does it work?

As you are aware, we at Emparion are not financial advisors and we cannot give financial advice. But it is critical that you understand how the interest crediting rate works.

First of all, your plan comes with a stated fixed interest rate of 4-5%. What this means is that the plan assets have an assumed return of 4-5% and our actuary will model contribution levels using this rate. As such, the goal of the plan is to generally mirror this rate. 

We know that most of our clients seek consistent annual contributions to lower taxable income. That’s why they want to make sure that they invest plan assets conservatively.

Large investment gains and losses lead to funding volatility. This can lead to large swings in annual required contributions. If your gains exceed the 5% rate, your future contributions will trend lower. On the other hand, if your investment gains are less than 5% it will push future contributions higher.

As such, we would recommend that you use a conservative investment approach. An investment allocated 100% to stocks is not recommended. If you desire more stock market exposure, please consider increasing stock allocation in IRAs, 401ks and other defined contribution structures. 

You are able to manage your own plan assets. However, if you are uncomfortable managing these investments, you should consider using a financial advisor that is familiar with these plans.