Let’s face it. Cash balance plans are expensive. What options do you have if you are looking for a low cost cash balance plan?
The plan structure is an important factor. But another important factor is the cost. Low-cost providers don’t provide advice or consulting to help create the plan, only an agreement.
A cash balance plan should have several illustrations, consultation, and analysis. It may also take a long time to administer. However, low-cost providers have the potential to be more affordable than a full-service plan.
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Business owners and the self-employed have a variety of retirement options. When most businesses think of a retirement account, they first think of a 401k. But there are undoubtedly other available options.
The first choice for many is the cash balance plan. It is not just for physicians and other high-income employers. For each cash balance plan participant, a “hypothetical account” is created to which contributions are directed.
All the participant funds in the plan are technically pooled into one account, and each participant with a “hypothetical account” with their designated balances.
The employer offering the plan will contribute a percentage of any participant’s compensation to the plan every year. As previously mentioned, this contributed amount is based on the participant’s yearly compensation. That amount is determined by a formula outlined in the plan documents.
The employer will also pay a preset interest fee into the account outlined in the plan documents. Generally, this amount is anywhere from 4% and 5% interest.
How much does a cash balance plan cost?
As stated, these plans can be expensive. But if you’re looking to get $75,000 plus into retirement there just aren’t a lot of options.
Set up typically runs $1,500-$3,000 for most providers. Annual administration usually runs $2,000-$4,000. Of course, it depends on how your plan is structured and more importantly how many employees you have.
The good news is you do get a tax deduction for any fees that you pay. These are company sponsored plans and so the tax deductions allowed.
We set up plans for $990. But that is just for the plan document and there is a participant fee of $250 for the first participant.
So our typical set up is $1,240. This is one of the lowest in the industry. But the set up can go higher if you add on additional “bells and whistles” like a prior service contribution or other types of plan design components.
But your set up fee is only paid one time. So the most important part of the equation is the annual administration fee.
Tell me about the benefits
Cash Balance Plans grow in two ways: employer contributions and a fixed or variable interest credit. The employer contribution increases the amount of the benefit by a percentage of the employee’s income. The variable component, however, is linked to a 30-yr Treasury Bond. This makes the future benefit more predictable.
The maximum amount of the benefit is based on your starting age and the type of plan you choose. The limit for an individual may be different than the maximum annual payment for the owner.
In addition to contributions, cash balance plans also have lifetime contribution limits, which are indexed to mortality rates. If you’re a business owner and you want to increase your contribution limit, you should ask your employer if the plan has a higher limit than you originally thought.
It’s important to remember that cash balance plans are not for everyone, so make sure you read the plan documents carefully. You will want to make sure that you understand what your options are when it comes to changing your retirement savings.
In addition to annual contribution limits, there is another important factor in setting a maximum contribution amount. If you have more than one employee, you should consider setting a maximum benefit amount. In some cases, the maximum benefit is lower than your salary.
Depending on your situation, you may need to contribute more to increase your contribution limit. For example, if you’re a business owner, your contribution may be more than double your income.
Low cost cash balance plan
But of course you can look around and try and find the best deal. But realize that a low cost plan is not necessarily the best plan.
Again, thanks to the tax deduction, you’re only going to pay the net amount after tax. Assuming you’re in a 40% tax bracket, a $2,000 annual fee only really costs you $1,200. So you need to look at the whole picture.
Many cash balance plan administrators will hand off the actuary fee or at least price it separately. For example, they may have a price of $1,500, but then you have to pay for the actuary fee separately. Most standalone actuaries would charge $500-$1,000 for simple solo plans.
This being the case, it is very common for administrators to bundle the actuary fees in their prices. This gives the business owner a one stop shop and make sure that they are not nickel and dimed on fees.
Here is a typical set up price for a low-cost cash balance plan:
A cash balance plan offers many advantages for the employer. As a bonus, they are tax-favored, and the deduction is much larger than with a defined contribution plan. Because they’re pre-tax, the employer can take a large tax deduction on any contributions.
One important feature of a cash balance plan is its flexibility. The majority of them allow their participants to roll their vested balances into another retirement plan, such as a 401k or IRA. This flexibility allows participants to move money into a new plan easily, even if they leave their employer.
As a result, cash balance plans are the preferred retirement vehicle for many business owners. Moreover, cash balance plans allow participants to build a nest egg while reducing their tax bills. If you are considering a cash balance plan, make sure you reach out to us!