April 22, 2020Institutional Investment ConsultingRetirement Plans

Cash Balance Pension Plan Investment Management

Tailored Retirement Plan Management


What is a Cash Balance Plan?

A Cash Balance plan is a unique tax-deferred (qualified) retirement plan that provides an alternative strategy to accelerate retirement savings with the added benefit of tax deductibility. Participant accounts exhibit the combined characteristics of a traditional defined benefit (DB) plan including high contribution amounts and guaranteed benefits with those of a defined contribution (DC) plan, where each participant maintains an account with the benefit of account balance portability. Cash Balance plans are sometimes described as a hybrid retirement strategy which utilize a different set of investment principles than either a DB or DC plan.

Achieving Account Growth

Each participant account grows annually in two distinct manners.

1. Annual Employer Contributions

  • Contributions are determined by a formula specified in the plan document as either a percentage of pay, a set dollar amount, or a combination of the two termed an actual meaningful benefit.
  • Plans often contain separate contribution tiers where different employee groups, subject to IRS discrimination testing, earn different annual amounts.

2. Plan Interest Crediting Rate (ICR)

  • Interest credit is guaranteed and may not be dependent on the plan’s investment performance.
  • IRS regulations state that an ICR can follow either a Safe Harbor rate or Actual Rate of Return, allowing the plan sponsor flexibility in initially designing their plan with the added ability to modify in subsequent years.
  • A Safe Harbor rate is benchmarked to a specific constant maturity U.S. Treasury, a predetermined fixed rate or a combination with specific floors and ceilings to limit plan risk.
  • Plan sponsors bear the investment risk of meeting the required crediting rate.


Advantages of Cash Balance Plans

Tax Reduction

  • Contributions are tax-deductible, while investment earnings grow tax-deferred for participants until they make withdrawals during retirement.
  • Accounts remain tax-deferred during a change of employment simply by rolling them into an Individual Retirement Account.
  • Tax deferral is the most important attribute of this retirement plan strategy.

Acceleration of Retirement Savings

  • When business principals and partners combine a cash balance plan with a 401(k)-profit sharing plan, retirement savings can often achieve more than 200% of their pre-plan retirement savings.
  • It is not uncommon to achieve a lifetime of retirement savings in half the amount of time when a cash balance plan is instituted.
  • Subject to limitations such as current laws and individual plan circumstances, annual contributions can range from $60,000 - $343,000 with a lifetime benefit limit of approximately $3,000,000.

Assets are Sheltered from Creditors

  • Plan assets are protected from creditors in events such as bankruptcies or lawsuits.

Stabilized Asset Growth

  • Conservative benchmarks and a short 1-year time horizon contribute to diminished fluctuations in plan value.
  • Growth is primarily achieved through high contributions and earning rates that exceed inflation without taking undue investment risks that are often evident in total return strategies prevalent in other retirement plan vehicles.
  • A hybrid defined benefit, such as a cash balance plan, can act as a substitute for other income producing allocations within a participant’s overall retirement strategy.

Talent Acquisition and Retention

  • Increasing benefits to principals and employees helps to attract, retain, and reward a talented workforce.
  • Professional service firms can provide a meaningful incentive to their entire employee base from partners to the general staff.

Investment Strategy Objectives

Cash Balance Plan assets are pooled and invested collectively with the goal of meeting the guaranteed interest crediting rate. If the plan’s investment earnings exceed the guaranteed rate, the excess is used to reduce future employer contributions. The amount credited to participant accounts does not change regardless of the investment rate of return. In other words, the account balances will increase solely as a result of the plan’s schedule. Similarly, if the investment performance is less than the crediting rate, then future sponsor contributions will eventually increase to make up for the shortfall. Optimized absolute returns with an annual investment horizon focused on the annual crediting rate is therefore a preferred strategy to that of more volatile total return strategies.

Cash Balance Plans Can Be a Powerful Retirement Option

Cash Balance Plans accelerate retirement savings through large tax deductions and the use of a stable investment strategy. Additionally, a strategic allocation to a cash balance plan can be thought of as a substitute for other income producing assets in a participant’s overall retirement portfolio.

Plan sponsors can tailor their plan to minimize funding risks, while at the same time offering participants a meaningful mechanism to increase tax deferred retirement savings. In today’s rapidly changing and competitive business environment, offering a valued employee or candidate the added benefit of a cash balance retirement strategy could be the difference between business success and mediocrity.

Advanced Capital Group has been consulting on Defined Benefit and Defined Contribution plans for over 20 years. We can help Advisors and Plan Sponsors implement an efficient retirement strategy for the future. Contact us at www.acgbiz.com.