I know this is a backwards question, so please skip the correction, but

If a client wanted help figuring out how to reply to his auditor's written inquiry about why their FAS LTROR assumption is 7% (or 6% or 6.5%, etc.) in a 50/50 balanced portfolio, what might be some helpful approaches?

Are there any "model" responses that could be considered.

Assume their ISP does not define a goal for an asset return.



In the old days, I would think that a reply might be that equities are expected to return u%-v% and fixed income might earn w% to y%, so apportion those to the asset allocations and you get Z%, but in the post-2008 world this seems a bit shaky.

Anybody dealt with this? Any auditor "traps" to be weary of?

Establishing FASB assumptions are the within the domain of the Plan Sponsor and the auditor. It is not incumbent upon the actuary to set these assumptions and there are some real dangers other than some basic commenting. Interestingly, search FASB87 and you will not find the word "actuary."

It is recomended that you advise the Plan Sponsor to work with its investment advisor to establish the LTEROR assumption.

A Steve Martin quote comes to mind. I just watched a funny YouTube version of it.

Many actuaries deal with this all the time. IMHO, your (intentionally brief) description is valid. However, selecting u%, v%, w%, y%, etc is a choice of the plan sponsor, usually in consultation with the plan's investment advisor. Practically, it does not always happen that way, but (as AtA correctly points out), the actuary should be careful to avoid this role, especially since choosing u, v, w, y etc may differ now from just a couple of years ago.

Thanks. That is what I was looking for, a general description of how the process might best be undertaken by the plan sponsor. And I appreciate and agree with the cautions.