At Emparion, a common request we receive is a multi-year funding projection. Clients want to know exactly what they will contribute and what their balance will be in five years.
We understand the appeal. However, experience has taught us that most of those numbers become obsolete within a year or two.
The problem is not the math, but the inputs that feed it. This article explains which variables reset every year and why no actuary can predict them.
How Interest Rate Changes Reshape Defined Benefit Plan Projections
Defined benefit funding calculations depend heavily on interest rates. The IRS publishes segment rates that actuaries use to value plan liabilities and set contribution ranges. When those rates move, the present value of promised benefits moves with them. A small shift can widen or narrow your allowable contribution meaningfully.
Lower rates generally increase the value of future benefits, which can raise the required and maximum deductible contributions. Higher rates tend to do the opposite, shrinking the funding range. Cash balance plans add another layer, because the interest crediting rate may also be tied to market benchmarks. Any projection must therefore assume a rate path for the next five years.
Nobody knows where interest rates will be in 2030, including the Federal Reserve. Segment rates also reflect averaging and statutory corridors, which Congress has modified several times. When we build a projection, we are effectively guessing at the rate environment years in advance. That guess alone can make a five-year forecast unreliable.
Annual IRS Limit Updates Change the Math Every Fall
Each fall, the IRS announces cost-of-living adjustments for the following plan year. These include the maximum annual benefit under Section 415(b) and the compensation cap under Section 401(a)(17). Both limits directly affect how much a defined benefit plan can fund. Because they are indexed to inflation, the size of each increase is unknown in advance.
The IRS also updates the mortality tables used to value plan liabilities. When life expectancy assumptions change, the cost of funding a lifetime benefit changes as well. These updates can raise or lower your contribution range even if nothing else changes. A projection built today cannot capture tables that have not been published.
Legislation adds further uncertainty beyond routine indexing. Laws like SECURE 2.0 changed retirement plan rules in ways few people anticipated years earlier. Over a five-year window, it is reasonable to expect at least some rule change. Any projection that ignores this possibility presents a false sense of precision.
Interest Crediting Rates Versus Unpredictable Asset Returns
Most cash balance plans credit participant accounts with a fixed interest crediting rate. At Emparion, that rate is usually set at 3% or 4% in the plan document. This rate determines how much each hypothetical account grows every year. It is a promise to participants, not a prediction of investment performance.
The actual plan assets, however, are invested separately and earn whatever the markets deliver. In one year, the portfolio might return 12%, while the next year it could lose money. Nobody can forecast those returns with any reliability over a five-year period. Yet the gap between actual returns and the crediting rate drives future funding.
When assets earn more than the crediting rate, the plan builds a surplus. That surplus can reduce future contributions and may even shrink your deductible range. When assets earn less, the shortfall must be made up through larger contributions in later years. Because the direction and size of that gap are unknowable, any projected contribution schedule is inherently speculative.
How Funding Ranges Make Contribution Forecasts Unreliable
Defined benefit plans do not have a single fixed contribution each year. Instead, the actuary provides a funding range between the minimum required and the maximum deductible amount. That flexibility is one of the most valuable features of these plans. It is also one of the biggest reasons long-term projections break down.
Most clients begin with a target contribution in mind, often the amount used in the original proposal. In practice, business owners adjust contributions based on cash flow, profitability, and tax planning needs. A strong year might justify funding near the top of the range. A slow year might push the contribution toward the minimum.
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Each decision carries forward into future years. Contributing above the minimum may create a prefunding balance that can offset future minimums. Contributing less can increase later required contributions. Once a single year departs from the original plan, every subsequent projected number shifts.
Changing Your Cash Balance Pay Credit Resets the Forecast
In a cash balance plan, each participant receives an annual pay credit defined in the plan document. Clients often assume the pay credit they choose today will stay the same indefinitely. In reality, you can amend the plan to increase or decrease pay credits in future years. Many owners do exactly that as their income, age, and goals evolve.
A higher pay credit raises the benefit being funded and typically widens the contribution range. A lower pay credit reduces the funding obligation, which can help during a tighter cash flow period. Amendments must generally be adopted before participants earn the benefits being changed. Accrued benefits cannot be reduced retroactively under the anti-cutback rules.
Pay credit changes also affect nondiscrimination testing when employees participate. Adjusting the owner’s credit may require changes to staff credits or the companion profit sharing plan. Each of these moves rewrites the assumptions behind any earlier projection. A forecast built on today’s pay credit schedule describes only one possible path.
Comparing Projection Assumptions With Actual Plan Results
The table below summarizes the main variables and how each one typically departs from the original assumption. Each row represents a factor we must guess at when building a multi-year forecast. Any one of them can change the outcome, and in practice several change at once.
| Variable | What a Projection Assumes | What Actually Happens | Effect on the Projection |
|---|---|---|---|
| Interest rates | A fixed or estimated rate path | Segment rates change monthly and averages shift annually | Liabilities and the contribution range change |
| IRS limits and mortality tables | Current limits and tables stay constant | New limits and tables are released each year | Maximum benefits and funding costs shift |
| Investment returns | Steady growth at an assumed rate | Year-end fair market value varies with markets | Surplus or shortfall alters future funding |
| Annual contributions | The same amount every year | Owners fund higher or lower within the range | Future ranges and balances diverge |
| Pay credits | The current pay credit schedule continues | The plan is amended as goals change | Benefit targets and testing results change |
| Compensation | Current W-2 wages continue | Salaries change with profits and tax planning | Pay-based credits and benefit limits change |
Beyond the five core variables, several other factors can quietly undermine long-range forecasts. Most of them relate to the business itself rather than to markets or regulations. We review these items every year when preparing the actuarial valuation.
- Changes in S corporation W-2 wages, which affect pay-based benefits and the compensation used in testing.
- Hiring, terminating, or promoting employees, which changes the census and nondiscrimination results.
- Adding or acquiring related businesses, which can trigger controlled group or affiliated service group rules.
- Shifting your planned retirement date, which changes the time available to fund benefits.
- Coordinating contributions with a 401(k) profit sharing plan under combined plan deduction limits.
- Terminating the plan early, which can require additional funding or create surplus considerations.
- New legislation that alters contribution limits, deduction rules, or plan design options.
Bottom Line
Defined benefit plan projections are useful for illustrating how a plan works, but they are not forecasts. Interest rates, IRS updates, investment values, contributions, and pay credits all change from year to year. That is why defined benefit plan projections are often inaccurate beyond the first year or two. The value lies in the concept, not the specific numbers.
Is a Cash Balance or Defined Benefit Plan Right For You?
The more reliable approach is to focus on each year’s actuarial valuation and funding range. That report reflects actual rates, actual limits, and actual asset values as of the valuation date. From there, you can make an informed contribution decision based on your current situation. At Emparion, we treat the plan as a living strategy rather than a fixed five-year script.
