Employees Retirement Savings Plans of Alcoa USA Corp. and Subsidiary Companies
Notes to Financial Statements
December 31, 2018
and 2017
The Plans hold a portfolio of investment contracts, all of which are synthetic. The Investment Contracts are held in the Fixed Income Fund (the
Fund) and are credited with earnings on the underlying investments and charged for participant withdrawals and administrative expenses. The wrap providers are contractually obligated to repay the principal by providing a guarantee that
the crediting rate will not fall below 0%.
Contract value, as reported to the Plans by the investment manager, represents contributions
made under contract, plus earnings, less participant withdrawals and administrative expenses. Participants may ordinarily direct the withdrawal or transfer of all or a portion of their investment at contract value.
Investment Contracts use the crediting rate formula to convert market value changes in the covered assets into income distributions in order to
minimize the difference between the market and contract value of covered assets over time. Using the crediting rate formula, an estimated future market value is calculated by compounding the Funds current market value at the Funds
current yield to maturity for a period equal to the Funds duration. The crediting rate is the discount rate that equates estimated future market value with the Funds current contract value, but it may not be less than zero.
The crediting rate, and hence the Funds return, may be affected by many factors, including purchases and redemptions by shareholders. If
the market value of the covered assets is higher than their contract value, the crediting rate will ordinarily be higher than the yield of the covered assets. Under these circumstances, cash from new investors will tend to lower the crediting rate,
and redemptions by existing shareholders will tend to increase the crediting rate. The opposite is ordinarily true if the market value of the covered assets is lower than their contract value. There are no reserves against contract value for credit
risk of the insurance companies or otherwise.
Certain events limit the ability of the Plans to transact at contract value with the issuer.
Such events include the following: (1) the Plans failure to qualify under Section 401(a) or Section 401(k) of the IRC, (2) the establishment of a defined contribution plan that competes with the Plan for employee
contributions, (3) any substantive modification of the Plan or the administration of the Plan that is not consented to by the insurance companies, (4) complete or partial termination of the Plan, (5) any change in law, regulation or
administration ruling applicable to the Plan that could have a material adverse effect on the Funds cash flow, (6) merger or consolidation of the Plans with another plan, the transfers of the Plans assets to another plan, or the
sale,
spin-off
or merger of a subsidiary or division of the plan sponsor, (7) any communication given to participants by the plan sponsor or any other plan fiduciary that is designed to induce or
influence participants not to invest in the Fund or to transfer assets out of the Fund, (8) exclusion of a group of previously eligible employees from eligibility in the Plan, (9) any early retirement program, group termination, group
layoff, facility closing, or similar program or (10) any transfer of assets from the Fund directly to a competing option.
The
Plans administrator does not believe that the occurrence of any such event, which would limit the Plans ability to transact at contract value with participants, is probable.
The Investment Contracts generally allow the contract issuers (banks or insurance companies) to terminate the agreement. However, the banks or
insurance companies would be required to grant the Fund a right to amortize any
market-to-book
differential over an agreed upon period of time.
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