How partners upgraded their cash balance plan

Partners of a specialized medical practice were faced with an expensive dilemma when the yearly return on their cash balance plan investments fell quite a bit short of the annual 4% fixed- return target. Not only would partners be required to make up the difference by increasing the current annual contribution by 25%, but the mismatch between the actual return vs. the fixed target return would also upset future budgeting.

To make matters worse, partners were increasingly dissatisfied being chained to a “strategy” targeting low, fixed-returns as a method allegedly used to ensure stable contributions – which as a practical matter simply did not work.

The recent failure of the plan to provide meaningful investment returns and stable contributions had leadership seriously considering terminating the plan. Fortunately, partners learned they could update their existing design by simply adopting an amendment allowing the plan to use daily market returns as the target rate. The new Market Return Cash Balance (MRCB) design would tie the plan’s target return to actual market performance to ensure greater predictable contributions and allow for a wider range of acceptable investment outcomes.

The benefits of MRCB design also provided that partner plan accounts would now be valued on a daily basis. Partners would have the same immediate access to the daily value of their cash balance accounts as they did with their 401(k)/Profit Sharing Plan.

The added benefit of valuing cash balance accounts on a daily basis also meant that participant distributions would now reflect the actual market value of the account at the time distributions occurred. By not valuing benefits using outdated quarterly or monthly valuation methods, both participant and plan sponsor could be certain they were provided the most accurate, fair and transparent valuation of benefits available.

Finally, the technology used to support the new daily MRCB design actually reduced administrative costs compared to what was previously charged under the fixed-target design.

Why October Three

At October Three, we are Retirement Architects: designing sustainable retirement programs for our clients and their employees. We are re-defining how retirement benefits are delivered by developing programs that leverage the best features of defined benefit and defined contribution plans while minimizing overall volatility.

For more information on how your company can benefit from a daily valued Market-Return Cash Balance Plan design contact Alex Kuhel at: akuhel@octoberthree.com or call 312-878-2440.

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