A FLEXIBLE DB PLAN?
plans can offer
owners a way to
Cash balance plans—when used in addition to a 401(k)/ profit-sharing plan—can
help business owners substantially
increase their retirement savings; but
the cat isn’t out of the bag—yet.
A majority of advisers still are
unaware of some of the changes that
were brought about by the Pension
Protection Act of 2006 (PPA). The PPA
involved many things—one of them
being clarification and support for
cash balance plans.
Nuts and Bolts
A cash balance plan is a variation
of a defined benefit plan; employers
(usually the business owners
themselves) make a contribution into
the plan on the employees’ behalf.
However, since these plans also
have some of the characteristics of
a defined contribution plan, they are
frequently called a “hybrid” plan (see
Cash Balance Basics).
Because the assets are pooled, the
investments usually are made with
a conservative bias, with a typical
target return ranging from 3% to 7%.
Dan Kravitz, President of Kravitz,
Inc., which designs, administers
and manages retirement plans and
specializes in CB plans, says most
plans use the 30-year Treasury rate as
a safe harbor investment.
As Kravitz explains, cash balance
plans can offer highly compensated
executives higher contribution limits
like traditional defined benefit plans
without cost volatility and interest
rate risk associated with them. Cash
balance plans also offer sponsors
and participants portability (assets
can be rolled into an Individual
Retirement Account) and participants
receive annual statements with their
account’s “cash balance.”
The main reason a profitable small-business owner would want to use
a cash balance plan as a retirement
savings vehicle is tax efficiency, says
Kravitz. “If your client is fortunate
enough to have a ‘problem’ with too
much profit, a cash balance plan can
offer a solution—pay fewer taxes and
save more toward retirement, for both
you and your employees,” he explains.
The “profitable” part is key,
explains Bruce Henning, a Charlotte,
North Carolina-based financial adviser