Many people profess to be retirement plan experts. But cash balance plan consulting is a little different. Most administrators just don’t know much about the plans.
Cash balance plans have been around for decades but haven’t received much notoriety until lately. With an increasing tax rate environment, many business owners are looking for ways to reduce their tax liability.
In this post, we will talk specifically about cash balance plan consulting. We’ll talk a little bit about how to structure a plan and what are some of the main questions and concerns. Let’s jump right in!
A cash balance plan is a type of employer-sponsored retirement plan that combines features of both defined benefit (DB) and defined contribution (DC) plans. In a cash balance plan, employees have individual accounts with a stated balance that grows annually based on a fixed contribution from the employer and an interest crediting rate. This makes it different from traditional pension plans, where the retirement benefit is based on a formula considering factors like years of service and salary.
In a cash balance plan, the employer is responsible for making contributions to each employee’s account, usually as a percentage of their salary. These contributions accumulate with interest over time, and the account balance grows regardless of the plan’s investment performance.
When an employee reaches retirement age or leaves the company, they can choose to receive their account balance as a lump sum or convert it into an annuity that provides a regular stream of income during retirement.
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One of the advantages of a cash balance plan is that it offers employees the security of a guaranteed benefit, similar to a traditional pension plan. It also provides portability, as employees can take their account balances with them if they leave the company before retirement.
Additionally, the plan allows for greater flexibility and control compared to a traditional defined benefit plan, as participants can see the value of their retirement savings grow over time, similar to a defined contribution plan. However, it’s important to note that cash balance plans may have complex rules and require actuarial expertise to ensure compliance and accurate calculations of benefits.
Structuring a cash balance plan requires careful consideration to ensure it aligns with the goals and objectives of the employer and provides optimal benefits for employees. Here are some key steps to help structure a cash balance plan effectively:
- Determine Plan Objectives: Clearly define the objectives of the cash balance plan. Consider factors such as attracting and retaining talent, providing retirement income, managing tax implications, and balancing costs.
- Actuarial Analysis: Conduct an actuarial analysis to determine the funding requirements and projected benefits of the plan. This analysis helps establish contribution levels, investment strategies, and projected outcomes.
- Contribution Design: Design the contribution structure in a way that balances the financial capabilities of the employer with the desired retirement benefits for employees. The contribution can be a percentage of compensation or a flat dollar amount, depending on the company’s financial position and goals.
- Interest Crediting Rate: Determine the interest crediting rate, which is used to calculate the annual growth of the participants’ account balances. The rate should strike a balance between being competitive for employees and financially sustainable for the employer.
- Vesting and Eligibility: Establish vesting schedules that define when employees become entitled to the employer contributions. Consider eligibility requirements, such as age or years of service, to ensure that the plan aligns with the company’s workforce and retention goals.
- Investment Options: Select a range of investment options that provide participants with diversified choices based on their risk tolerance and retirement goals. Offer a mix of conservative and growth-oriented investment options to cater to different employee preferences.
- Plan Communication and Education: Implement a comprehensive communication and education strategy to ensure employees understand the cash balance plan, its benefits, and how it aligns with their retirement goals. Provide ongoing support and educational resources to help participants make informed investment decisions.
- Compliance and Administration: Ensure the cash balance plan is designed and administered in compliance with applicable laws, such as the Employee Retirement Income Security Act (ERISA). Engage the services of professionals experienced in retirement plan administration to handle compliance, recordkeeping, and reporting requirements.
- Periodic Plan Review: Regularly review the cash balance plan to assess its effectiveness in meeting the desired objectives. Consider factors such as employee satisfaction, plan costs, investment performance, and any regulatory changes that may impact the plan.
- Seek Professional Guidance: Consulting with retirement plan experts, such as actuaries, financial advisors, and legal counsel, can provide valuable insights and ensure compliance with complex retirement plan regulations.
Cash Balance Plan Consulting
Remember, every organization’s needs and circumstances are unique, so it is crucial to tailor the structure of a cash balance plan to align with the specific objectives and requirements of the company and its employees.