Cash Balance Plan Actuary: How to Select the Right One


The cash balance plan actuary is an important part of the cash balance process. They provide critical tasks that are required to set up and administer each plan.

But what do they actually do? The most important thing they do is sign of on the Schedule SB. This is an important requirement.

In this post, we will examine the responsibilities of the cash balance plan actuary. We’ll break down what they do and point out some of their challenges. Let’s take a closer look.

Some background

Employee Retirement Income Security Act (ERISA) classifies retirement plans into two – defined benefit plans and defined contribution plans. A cash balance plan falls under define benefits plan but maintains individual employee accounts like a defined contribution plan.

Under cash balance plan, an employee’s account earns a pay credit, normally 5% of their salary each year, plus an interest credit, at a fixed rate or variable rate on your account balance. Increase or a decrease in an employee portfolio’s value does not affect the contributions, and the employer is the one bearing this risk

Does a cash balance plan need an actuary?

Yes. Cash balance plans are a specific type of defined benefit plan. As such, actuaries must meet similar compliance requirements. This includes the requirement to have the plan certified annually by an actuary.

While cash balance plans are not new, their popularity in recent years has brought forth new features that make these plans increasingly complex. Consequently, the way that these plans are analyzed needs to be reevaluated. This has necessitated plan administrators to look for services of an actuary to assist manage the cash balance pension plan.

Get a FREE IllustratioN!

Just give us a little information and we’ll get you a custom illustration in 24 hours.

Actuaries are well qualified to advise plan administrators on cash balance issues, especially about potential benefit payments, plan liabilities and how to balance the interests of the various parties involved. They also do assessments and communicate the likely financial impact of uncertain future events. It is critical for them to follow all cash balance plan rules.

What Does a Cash Balance Plan Actuary Do?

  1. An actuary advises the plan administrators and participants on the funding positions of the plan. The actuary carries out regular valuations on plan assets and investments.
  2. An actuary also conducts a plan valuation, and provides advice on the contribution that needs to be paid in the future to achieve and maintain the plan objectives. An actuary will carry out a test to ensure that the contribution rate is not lower than what is allowable by the IRS and not too high for the plan to experience shortfalls.
  3. Cash balance actuary also analyses and advice the plan administrators of any financial consequences if any proposals to be implemented on the plan. An actuary should analyze outcome when changes to the plan rules are proposed or when augmentations of an individual’s benefit or group member’s benefits are considered.
  4. Cash balance plans allow are considered portable, meaning that an employee can shift their vested assets to another plan or roll into an IRA. Plan actuary is required to certify that the value offered to a member who wishes to transfer his or her benefits are calculated in accordance with the appropriate statutory and professional requirements.
  5. Plan actuaries also have a statutory duty to report to IRS, ERISA, and DOL any breaches of law that may be committed by plan administrators and plan participants. This function normally causes friction between plan trustees and their actuary, an actuarial adviser, who is not a plan actuary, therefore, does this function.
Pros & ConsActuary Tasks
Pro: Ensures ComplianceCalculate Annual Funding Levels
Pro: Provides Monitoring & ReviewPrepare Schedule SB
Con: Higher Plan FeesMonitor Compliance
Con: Complex Plan StructuresReview with Client & TPA

Understanding the rules

Cash balance plans require solid investment returns to benefit participants. Investment allocations should be analyzed and revised on an annual basis. If not, unexpected shortfalls can occur.

Companies should avoid significant unanticipated contributions, resulting in a strain on cash flows. Thorough planning and research should happen with essential decisions regarding shortfalls, asset allocation, and interest rates.

Cash balance plans have more extensive rules than those of defined contribution plans. But be careful. If an employer owns several businesses, it can be a significant complication. The combined businesses will likely have to cover all employees (with some limitations). The IRS will typically view the businesses as a “controlled group.” If the owner has multiple business interests, an upfront discussion should occur with the CPA and plan administrator.

Finding Qualified Cash Balance Plan Actuaries

Plan sponsors or administrators bear investment risks for the plan. If the investment doesn’t give the required returns, the administrator will be forced to make unanticipated contributions.

With the complexity of decisions to maximize returns, an actuary is required to help in managing responsibilities. Please note that actuaries only give advice, the decision-making powers are vested with the plan trustees. Pension rules are complex so make sure you do your diligence.

Paul Sundin

Get a FREE 30 Minute Consultation

Reach out to us today and we'll show you our favorite strategies! We can show you how to structure a plan for maximum tax benefit and provide you with a custom plan design.

Leave a Comment