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Cash Balance Plans, now the cute girl at the dance
Cash Balance Plans, now the cute girl at the dance

Cash Balance Plans, now the cute girl at the dance


Total Cash Balance Plan assets soared to $952 Billion by the end of 2013

By John Logan

(the last year for which complete Department of Labor and IRS data is available) and have likely already surpassed the $1 Trillion mark by now, a key indicator of their growing importance in the retirement plan marketplace.

What? You’ve never heard of a Cash Balance Plan before?

You’re not alone. While Cash Balance Plans are certainly not a new comer to the retirement planning industry (some of the biggest US companies like AT&T, Boeing, IBM, some of the largest Medical facilities and law firms have had Cash Balance Plans for years) these “hybrid” plans are still not very well known amongst many CPAs and Financial Advisors.

Once so highly complicated and hard to administer that they were relegated to only the dusty, far corners of retirement planning, they have had a rush of mainstream growth in recent years. In fact, according to the 2015 National Cash Balance Plan Research Report, from Kravitz Inc. (the company that publishes an annual research report that analyzes Cash Balance data from the most recent IRS Form 5500 filings), the popularity of Cash Balance Plans has soared since 2001, with annual growth in the double-digits every year of the last decade and new Cash Balance Plans in just the last 5 years alone have had a combined increase of more than 100%.

While Cash Balance Plans still only represent just a small slice of the whole retirement pie, they’re growing faster (32% in 2013) than all other account types, including 401(k)s (only 3% growth in 2013). And Cash Balance Plans now make up over 30% of all defined benefit plans, up from 2.9% in 2001.

Even more growth is probably already on the books due, in no small part, to an IRS ruling in late 2014, that everyone in the Cash Balance Plan business had been waiting for since 2010, which broadened the choices available to cash-balance plan sponsors in setting their interest crediting rates and also gave sponsors the option of multiple investment strategies within a single plan.

Under the new rules, a plan sponsor might use a strategy of a more conservative portfolio for older, longer-term employees and a completely different portfolio direction for another group of employees. While not overt, the more flexible IRS regulations were looked at by the retirement planning market as a strong endorsement of Cash Balance Plans.

What’s the attraction?

Beyond the Baby Boomer generation’s well documented lack of retirement preparedness that is pressuring many older business owners to find methods to accelerate their savings and make the best use of their qualified plan contributions, rising taxes on the federal, state and local level have motivated countless business owners to find ways to take full advantage of tax-deferred retirement savings and capitalize on tax deductions for contributions to employee retirement accounts. All of which would fall under the “advantages” column for Cash Balance Plans.

These “hybrid” plans, so called because they combine the high contribution limits of a traditional defined benefit plan with the flexibility and portability of a 401(k) plan, also avoid the common risk factors and runaway costs involved in traditional defined benefit plans. The 2006 Pension Protection Act reaffirmed the legality of Cash Balance Plans and made the plans less challenging to administer.

Plus, new IRS Cash Balance regulations in 2010 and 2014, as mentioned above, expanded investment options, minimizing many funding issues.

As recently as five years ago, many financial professionals were unaware that Cash Balance Plans were even an option. Now, even though awareness is dramatically higher and growth has continued to accelerate there are still plenty in the profession who, for whatever reason, have never heard of them, or simply don’t know enough about them to feel comfortable just bringing up the subject with clients.

The escalating popularity of Cash Balance Plans has corresponded to the steadily increasing decline in traditional defined benefit style pensions due to the ongoing challenges with risk and cost unpredictability, but a real boom has occurred in the professional practices segment which currently accounts for the largest segment of cash balance plans, the highest concentration being in the medical field. The vast majority of Cash Balance Plans – just under 90% in 2013 –  being implemented in companies with under 100 employees. Mainstream America, not corporate giants.

Cash Balance Plans are especially appealing to that demographic (i.e. accounting firms, lawyers, doctors and dentists) since these professionals often earn much higher than average annual salaries and too often get a later start in accruing significant personal retirement savings.

If that sounds like you, pay attention.

And Cash Balance Plans don’t just benefit the employer. Once implemented, often company contributions to employee retirement savings more than double. The average employer contribution to staff retirement accounts is 6.3% of pay in companies with both cash balance and 401(k) plans, compared with 2.8% of pay in firms with 401(k)s alone, according to the Kravitz report. So they’re often great for attracting and retaining high quality employees.

Generally, Cash Balance Plans require employers to contribute between 5-8% of pay to “non-highly compensated employees” in order to contribute larger amounts for the more highly compensated employees, e.g., partners or owners.

Plus, according to the report, Cash Balance plans offer other advantages to employees, like the fact that employees don’t have to reduce their take-home pay in order to receive an employer contribution, since Cash Balance contributions are not based on a “match.” Also, investments are chosen by the plan sponsor or a TPA so employees don’t bear any of the investment risk, unlike most 401(k) plans. Assets in the plan are typically pooled and invested by the plan sponsor or administrator targeting some conservative benchmark, so the invested principal of their retirement savings is better protected from too much market volatility.

In addition, they’re portable where traditional pensions aren’t. When an employee retires or otherwise exits, they have the option of either a lump sum that can be rolled over into an IRA, or an annuity.

Cash Balance Plans are especially attractive to firms with multiple owners, like law firms and medical/dental practices, or any business owner or partner who’s already taken their $59,000 tax deduction after maxing out their 401(k) profit-sharing plan contribution and is looking for more top line savings.

The plans can cost more to set up than 401(k) plans, partly because of the annual requirement of an actuary’s certification that the plan’s status complies with IRS regulations. But for many business owners, the significant tax advantages that come with plowing six-figure annual contributions into the plans far outweigh the expense. Typical costs include $2,000 to $5,000 in setup fees, $2,000 to $10,000 in annual administration fees, and investment-management fees ranging from 0.25% to 1% of assets, but for business owners over 54, typical tax savings can often amount to more than $100,000.

According to Kravitz’s table of 2016 contribution limits tables, a 57-year-old with a Cash Balance Plan can contribute an additional $200,000 to their retirement. And that can mean a tax savings of more than $116,550. For someone 65 or over, that contribution limit jumps to $245,000. Meaning a participant in a Cash Balance Plan may be able to squeeze 20 years’ worth of savings using another form of retirement plan into as few as 10. That’s what makes these plans so super-powered. 

So, if you’re a business owner and your CPA or Financial Advisor hasn’t already offered that solution from his bag of tricks, especially if you’re in a high earning family business or professional practice of any kind, tell them you want them to learn more about Cash Balance Plans to determine if they’re a good fit for you. That simple request could be worth six figures for you down the road.

About the Author:

John Logan photo

John Logan is the publisher and Senior Editor of

He is also an experienced insurance professional, multi-industry serial entrepreneur, new product developer and certified Cash Balance Plan expert. Starting his first venture in 1982 at age 25, he has been a founder, partner or major contributor in five successful startups in the entertainment, publishing, HR software, online media and insurance industries, so John knows well the special challenges that small business owners and entrepreneurs face.

Aside from being a Partner at Cash Balance Advisors, John is currently CEO at SafeGuard Guaranty Corporation, an insurance product development company.


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