Many business owners are excited about the significant contributions available under cash balance plans. There are few retirement structures where you can contribute as much and take such a sizable tax deduction. But the cash balance plan cost, pricing schedule and fees can be a significant hurdle.
At Emparion, our cash balance plan set up is currently $1,790 for a solo plan. But many administrators will charge substantially more. We see $2,000 to $4,000 as the average.
Because of plan monitoring, filing requirements, and actuarial review, these plans are significantly higher to administer than a traditional 401(k) plan. So, make sure you analyze whether or not the plan costs make sense based on your situation.
Cash balance plan cost
Any cash balance plan provider should be doing the following:
- Providing upfront consultation and plan design;
- Discussing the plan with accountants and/or financial advisors;
- Drafting the required plan documents;
- Making sure that you make all the contribution deadlines;
- Ensuring that there is actuarial review;
- Monitoring the plan for compliance on an annual basis;
- Terminating a plan if necessary based on changing business conditions; and
- Making sure that tax returns and compliance is addressed with the IRS and Department of Labor.
Even though the procedures that providers follow may be similar, the cash balance plan cost and fees can vary widely. We have seen fees as low as $1,500 and as high as $15,000.
For a solo cash balance plan with just one qualifying employee, you would expect to stay on the low-end of the pricing schedule. But as the plan gets more complex with numerous employees and testing requirements, cost can certainly go up. But nevertheless, an average plan should cost around $2,000 to $4,000 to set up. With annual administration and tax filing to be around the same amount.
Low fee/cost providers?
There are certainly low-cost providers. The problem with any low-cost provider is that you often don’t get any consulting or advice on the plan design itself. It’s one thing to just provide a plan agreement.
However, any company needing to set up a plan must have an up-front consultation, analysis, and several different illustrations generated to make sure the plan works right for their situation. The cash balance plan rules can take time to administer.
There is no doubt that these cash balance plan fees are higher than those charged for a 401k plan. But remember, you cannot contribute as much into a 401k plan as a cash balance plan. On top of that, annual actuarial review must take place and actuaries aren’t cheap.
Of course, one advantage is that any cash balance plan fees that you pay are tax deductible. So if you are in a high tax bracket (like most cash balance plan participants), you may only be paying 60 cents on the dollar for those fees on an after-tax basis.
So looking at it from a return on investment standpoint, you will find that cash balance plans have very reasonable pricing schedules overall. Take a look at a cash balance plan example to see for yourself.
In most situations it doesn’t make sense to spend more than $5,000 for a plan unless there are substantial upfront consulting and it is a very complex plan. But sometimes the price may warrant it. As a general rule, for most of our plans we charge $2,000 to $3,000 for set up and a comparable fee schedule for annual compliance and review.
There are certainly many businesses that need complex advice. But for many providers setting up a new plan, you can definitely stay on the low-end of the rate schedule. But don’t decide on your provider solely based on low fees, make sure that you do your diligence. The cash balance plan cost is only one factor to consider.
While it depends on the plan structure and the number of employees, each plan will normally have a set up fee and an annual maintenance fee. Average industry wide pricing will be $2,000 to $4,000 for plan set up and the same fee for ongoing administration. Many TPAs will charge the set up fee and the first year administration up front.
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How to calculate cash balance plan fees
- Determine if any customization or plan tailoring is required. The more specialize the plan document the higher the cost. So if you are looking to make a prior service adjustment or to break out many service groups that can cost you a bit more.
- Take a look at the number of total employees and eligible employees. Employee headcount is a large factor in overall cost. For this reason, solo plans are often the easiest to administer and come with a lower cost structure. This is true even when a spouse is added.
- Time of year. It should be no surprise that most plans are set up at the end of the calendar year. This is of course because plans need to be established before the end of the year in order to be compliant. For this reason, most TPAs will have minimal price flexibility in December.
Cash balance plan fee schedule
By now you should understand that cash balance plans are not as simple as just setting up a plan document. It must be considered part of a detailed process.
The following is an example of a cash balance plan fee schedule for set up:
| Task⏩ | Cost or Fee⏩ |
|---|---|
| Initial plan document | $1,540 |
| Participant fee | $250 |
| Prior service | N/A |
| Illustration & consultation | N/A |
| Preparation of Form 5500 | N/A |
| TOTAL COST | $1,790 |
Final thoughts on Cash balance plan pricing
Searching out for the low-cost provider might not make the most sense. Because you get what you pay for. You may get a plan set up but it may not be customized for you and your business. At the end of the day, you need to make sure that it accomplishes your goals.
When evaluating cash balance plan fees, it’s essential to consider both the upfront and ongoing costs associated with plan administration, actuarial services, and investment management. While these fees may seem complex, they are a necessary component of ensuring compliance and maximizing tax advantages. Businesses should work closely with experienced administrators to understand the full scope of expenses and how they impact the overall benefits of the plan.
Ultimately, the value of a cash balance plan far outweighs the costs for many high-income business owners and professionals. The ability to make substantial tax-deductible contributions, grow retirement savings at a predictable rate, and offer competitive benefits to employees makes these plans a powerful financial tool. By carefully selecting providers and monitoring plan expenses, businesses can ensure they are optimizing their retirement strategy while keeping costs manageable.
For those considering a cash balance plan, conducting thorough due diligence on fees and service providers is crucial. A well-structured plan with transparent pricing and effective management can lead to significant long-term financial advantages.
Is a Cash Balance or Defined Benefit Plan Right For You?
