Who Manages a Cash Balance Plan? TPAs, Financial Advisors and Actuaries

By now you are probably aware of all the tax advantages of cash balance plans. But who manages a cash balance plan?

The reality is that there are many players involved. In fact, we know that over 90% of financial advisors don’t know much about these plans. So, everybody needs to be on the same page.

In this article, we will examine the administrative issues relating to the plans. We will also take a look at the players who are responsible for the plan oversight. Let’s dive in!

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Administration Background

A cash balance pension is a defined benefit retirement plan that combines features of traditional pension plans and 401(k) plans. As with any retirement plan, it is crucial to have a qualified and experienced team of professionals managing the plan. This ensures that it complies with all applicable regulations and provides employees with the desired benefits.

The plan sponsor is ultimately responsible for managing a cash balance plan. This can be an employer or group of employers who establish the plan for the benefit of their employees. The plan sponsor works closely with the plan administrator to design and implement the plan. The TPA will ensure that it complies with all relevant laws and regulations.

The plan administrator is responsible for the day-to-day management of the cash balance plan. This includes tasks such as managing plan contributions, calculating benefits owed to employees, and maintaining accurate records of plan activity. The administrator must also ensure that the plan complies with all applicable regulations.

They often communicate the plan’s features and benefits to employees. In many cases, the plan administrator is an independent third-party firm (TPA) specializing in retirement plan administration. This gives them the expertise to manage complex plans like cash balance plans.

Cash Balance Plan Administrator (TPA)

A cash balance plan administrator is an entity responsible for managing and overseeing the operation of the plan. Cash balance pension plans are defined benefit plans that offer a fixed benefit to employees upon retirement.

The plan’s formula primarily considers the employee’s years of service and compensation. These plans are becoming increasingly popular among small business owners and self-employed individuals to save for retirement and provide retirement benefits to their employees.

The cash balance plan administrator is responsible for many aspects of plan administration, including designing and implementing the plan, managing plan contributions, calculating benefits owed to employees, and maintaining accurate records of plan activity.

The administrator is also responsible for ensuring the plan complies with all applicable laws and regulations. This can include filing annual reports with the IRS and Department of Labor and making necessary adjustments to the plan’s funding or benefit structure to ensure compliance.

The cash balance plan administrator is often an independent third-party firm specializing in retirement plan administration. These firms have the expertise to manage complex plans like cash balance plans.

They can provide valuable guidance to plan sponsors on various plan designs, funding, and compliance issues. Some administrators may also provide investment management services. However, the plan sponsor or trustee typically retains ultimate control over investment decisions.

Who Manages a Cash Balance Plan?

A cash balance plan administrator is responsible for overseeing and managing a defined benefit retirement plan known as a cash balance plan. These plans combine features of traditional pension plans and 401(k) plans, providing a fixed benefit to employees upon retirement.

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As a cash balance plan administrator, some of the essential duties and responsibilities may include:

  1. Designing and implementing the plan: The administrator is responsible for developing the cash balance plan to ensure that it meets legal requirements and provides employees with the desired benefits.
  2. Communicating the plan to employees: The administrator must educate employees about the plan and how it works, including the eligibility requirements, contribution limits, and the calculation of benefits.
  3. Managing plan contributions: The administrator is responsible for ensuring that contributions are made to the plan under the plan document and applicable regulations. They also monitor the plan’s funding status and may adjust contributions to ensure it remains financially sound.
  4. Calculating benefits: The administrator must accurately calculate the benefits owed to employees upon retirement or termination of employment. This involves considering the employee’s years of service, salary history, and other factors.
  5. Recordkeeping and reporting: The administrator must maintain accurate records of plan activity and provide regular reports to plan participants and government agencies as required by law.
  6. Compliance and regulatory issues: The administrator must stay updated with changes to laws and regulations that affect cash balance plans and ensure that the plan remains compliant.

Overall, the cash balance plan administrator is critical in helping employees prepare for retirement by managing the plan’s finances and ensuring participants receive the benefits they are entitled to.

How to Manage a Cash Balance Plan

Here are 5 ways to manage a plan:

  1. Regularly review plan performance

    Regular review of the cash balance plan performance can help identify areas of improvement and ensure that the plan remains aligned with the company’s financial goals and objectives. This review should involve your CPA and financial advisor.

  2. Monitor funding requirements

    Monitoring funding requirements is essential to ensure that the plan remains adequately funded. It’s important to monitor cash balances and contributions to the plan to ensure that the funding requirements are met. You should be careful of overfunding a plan. This can result in an excise tax of 50% plus up to 40% tax on reversion.

  3. Manage investment risks

    Managing investment risks is crucial in maintaining the financial health of the plan. It’s important to review the investment portfolio regularly and ensure that it’s diversified, aligned with the plan’s investment objectives, and managed by qualified professionals. Investment allocations should be conservative with a minimal allocation to stocks.

  4. Stay compliant with regulations

    Cash balance plans are subject to various regulatory requirements. It’s important to stay up-to-date with the latest regulations and ensure that the plan is compliant with all relevant laws and regulations. Make sure all IRS and DOL forms are timely filed.

  5. Communicate effectively with plan participants

    Communication is key to ensuring that plan participants understand the benefits and features of the cash balance plan. It’s important to communicate regularly with plan participants, provide education and training, and answer any questions or concerns they may have. Participant statements should be made timely to inform your employees of contribution balances and any plan changes.

TPA or AdministratorFinancial Advisor
Files Form 5500 with IRSIn Charge of Investment Choices
Monitors ComplianceConservative Investment Mix
Files Schedule SBPlan Fiduciary
Plan ConsultingMust have Defined Benefit Experience

Investments in a cash balance plan

In a cash balance pension, the investments are typically managed by the plan sponsor or trustee rather than a financial advisor. The plan sponsor or trustee is responsible for selecting and monitoring the plan’s investments and ensuring they are consistent with its investment objectives and risk tolerance.

Who Manages a Cash Balance Plan

Financial advisors can guide investment options and asset allocation. They typically do not have direct management control over the investments in a cash balance plan. Instead, they may work with the plan sponsor or trustee to help design an investment strategy that aligns with the plan’s goals and objectives. They may also provide ongoing advice and guidance to help ensure the plan’s investments remain on track.

The role of a financial planner can vary depending on the specific cash balance plan and the plan sponsor’s needs. Some plan sponsors may work with a financial advisor specializing in retirement plans to guide investment options and other plan-related issues. In such cases, the financial advisor may work closely with the plan sponsor to develop and implement an investment strategy tailored to the plan’s specific needs and objectives.

Does a cash balance plan have to have an actuary?

Yes, an actuary is needed for a cash balance plan. Actuaries must design and administer cash balance plans because they are responsible for calculating and projecting the plan’s funding requirements, determining the employer’s contribution amounts, and ensuring that the plan complies with applicable regulations and standards. They also perform actuarial valuations and make adjustments to ensure the plan remains properly funded over time.

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In short, actuaries play a critical role in the success and compliance of a cash balance plan, so it is important to work with an experienced and qualified actuary when establishing and maintaining this type of retirement plan.

Final Thoughts

When it comes to retirement planning, there are many different solutions. There are many ideal situations if a business owner has few or no employees. It usually involves a 401k with a profit-sharing component and a cash balance plan.

Most of my clients can quickly understand the mechanics of a 401(k) plan. But a cash balance is entirely different.

Overall, qualified retirement plans are an essential tool for helping employees save for retirement and should be carefully considered by both the company and employees as part of their overall retirement savings strategy.

Paul Sundin

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