Cash Balance Plans: What are They?

Welcome to a special series from Robin Weingast & Associates on Cash Balance Plans! If you keep up with our Resource of the Month series, you’ll recall that we recently provided two resources on Defined Benefit Plans: One on Traditional Defined Benefit Plans and one on Fully Insured Defined Benefit Plans.

This month we want to give you an in-depth look at the fastest-growing type of Defined Benefit PlanCash Balance Plans. Since 2001, Cash Balance Plans have soared, with double-digit annual growth each year of the decade and an increase of more than 600% in 12 years:

Robin-Weingast-Cash-Balance

This growth is why we’re presenting a special four-part series on Cash Balance Plans that explains what they are, their advantages, good candidates for adopting a cash balance plan, and other considerations.

Cash Balance Defined Benefit Plans: What Are They?

Professionals of highly profitable businesses are generally looking for larger tax deductions and accelerated retirement savings with minimal costs for employees, so a Cash Balance Plan working in coordination with an already established 401 (k) Profit Sharing Plan may be the perfect solution for your practice. Current tax legislation is encouraging many professionals to adopt this type of plan arrangement as part of their pension programs.

A Cash Balance Plan is a “tax qualified” retirement plan, similar to a 401 (k) Profit Sharing Plan in that it allows for tax deductible contributions and deferral of taxes, as well as creditor protection under the Employee Retirement Income Security Act (ERISA).

While assets of a Cash Balance are invested in a single pooled investment account, each participant has has an account, similar to a 401 (k) Profit Sharing Plan, that is record kept by the plan actuary, who generates annual participant statements, so that employees know what they have accumulated in the plan.

Participants’ account balances in a Cash Balance Plan grow annually in two ways:

1) The employer’s contribution, which is a percentage of compensation or a flat dollar amount based on a formula specified in the plan document, and;

2) An annual interest credit, which is a guaranteed rate of return, independent of the plan’s investment performance. The guaranteed rate varies each year but it is generally equal to the yield on 30-year Treasury bonds, which has hovered close to 5% in recent years.

In our next part, we’ll explore the advantages of these plans.

If you think a Cash Balance Plan may be right for you, it’s vital that you have the right guidance. The Robin Weingast & Associates team of enrolled actuaries and certified pension and employee benefit consultants are essential partners who can help you develop and get the most out of a Cash Balance Defined Benefit Plan as part of your retirement program. Contact us today for more information.

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