Cash Balance Plans: A Guide for Financial Advisors

Continually finding new ways to grow your book of business is an ongoing challenge for advisors. One powerful but often underutilized opportunity lies in incorporating Cash Balance plans into your service offering. These plans not only help differentiate your practice and increase AUM but also provide significant tax advantages that can be especially compelling for high-income individuals.

However, as with any new service, having the full picture helps determine whether to incorporate it into your offerings. In this article, we explore how Cash Balance plans work, the benefits that make them attractive, the types of clients who stand to benefit most, and the common questions and concerns advisors encounter when integrating them into their services.

How Does a Cash Balance Pension Plan Work?

Cash Balance plans offer the best of defined benefit and defined contribution plans by combining the guaranteed retirement benefits of a traditional pension plan with the transparency and flexibility of a 401(k).

Cash Balance plans grow each year through employer contributions and interest credits. But unlike a 401(k), where investment risk lies with the participant, the employer shoulders the investment risk in Cash Balance plans, ensuring the promised account balance regardless of market fluctuations.

A typical Cash Balance plan's account is comprised of two types of credits:

1. Pay credit: This is a set percentage of a participant’s compensation or a fixed dollar amount paid into the account by the plan sponsor.

2. Interest credit: There are two different ways to credit interest today, a fixed structure and a variable structure. Fixed interest credits are tied to an index rate, such as a treasury rate. However, variable-rate interest credits are based on the investment return of the underlying plan assets. As a result, they are more common as they align the growth of the account balance with the growth of the assets directly, minimizing risk and volatility to the plan sponsor.

The end result is a guaranteed retirement benefit, either as a lump sum or converted into a lifetime annuity, based on the employee’s tenure, earnings, and the plan’s pay and interest credits.

What Are the Benefits of a Cash Balance Pension Plan?

Cash balance plans offer employees a more flexible path to retirement readiness. As a plan sponsor, you benefit from significant tax advantages, predictable costs, and reduced risk, while participants gain the opportunity to accelerate their retirement savings.

Here’s a closer look at the primary advantages of Cash Balance plans:

• Tax-deferred status: As qualified retirement plans, cash balance plans are tax-differed. Participants do not pay taxes on their retirement savings until they make withdrawals, and employers’ contributions are tax-deductible when made, reducing the organization’s taxable income.

• Larger contributions/accruals: Cash balance plan contribution limits increase as participants age and earn more, enabling participants to increase their retirement savings while often reducing their annual tax burden.

• Increased visibility: Cash balance plans enable participants to see their balance and watch as their account grows each year, delivering a similar participant experience as a 401(k) plan.

• Flexible payout options: Participants can choose a lump-sum payout that can be rolled over into IRAs or other retirement plans for continued tax-deferred growth, or they can convert some or all of their balance into a lifetime annuity.

• Greater protection for participants: Cash balance plans also benefit from enhanced protection under the Employee Retirement Income Security Act (ERISA), to safeguard participants' accrued benefits from bankruptcy, lawsuits, and creditors. Plans are also often insured by the Pension Benefit Guaranty Corporation (PBGC), further enhancing their reliability if a plan sponsor fails to meet its financial obligations.

Who Is a Cash Balance Plan Best For?

Cash Balance plans can offer significant tax savings and support long-term retirement goals, but they aren’t for everyone.

Three general groups within an advisor’s book of business may benefit the most from a Cash Balance plan. They include:

• CPAs, lawyers, doctors, IT consultants – professional services

• Owner-only businesses

• High earners with consistent income

If a significant number of clients fall into these categories, then offering a Cash Balance plan may be beneficial.

What Challenges Should an Advisor Consider?

As mentioned before, Cash Balance plans are not for everyone. Below are a few things an advisor should consider when determining whether incorporating Cash Balance plans into their offerings is a worthwhile strategy.

• Accessibility of Funds: Unlike 401(k) plans, which may offer loans or hardship withdrawals, Cash Balance plans are designed to be permanent, with no option for elective contributions. Withdrawal timing is limited to a distributable event, such as retirement, termination, death, disability, or the participant reaching a specified age, when the plan may allow them to access their account balance.

• Added Costs: Cash Balance plans can lead to higher costs. For instance, an actuary must review and certify plans each year to ensure compliance and proper funding. Employers should consider these additional expenses as part of the overall benefits package offered to employees.

• Additional Rules: Cash Balance plans come with their own set of rules and restrictions, which require an actuary to ensure compliance with IRS laws and regulations.

Finding the Right Cash Balance Plan Partner

As a nationally recognized leader in the Cash Balance plan space, October Three designs tailored solutions that prioritize participant and employer goals.

When advisors partner with us, they also receive expert guidance to navigate the complexities of the retirement planning landscape with confidence. From strategic practice growth to educational resources and assistance, our Retirement Learning Center team works with you to develop a custom program that supports your AUM goals. Below are a few of the specific ways we help:

• Expert Erisa Guidance: Get support from seasoned consultants who can provide unbiased expertise in ERISA compliance and best practices.

• Practice Optimization: Pinpoint inefficiencies and untapped opportunities within your practice.

• Deepen Relationships: Gain crucial insights into contributions, distributions, and the vesting of your clients’ retirement plans, and receive personalized consultation on each plan’s intricacies.

• Locate New Prospects: Get access to O3 Edge, a powerful and intuitive retirement plan prospecting tool designed to amplify your practice’s competitive advantage.

• Continuing Education: As an approved CE provider, we offer CE courses for credit, actionable educational content, and total CE administration for SHRM, CPE, CFP, CIMA, CPWA, CIMC, and RMA designations

Click here to learn more about how partnering with October Three can help you incorporate Cash Balance plans into your services.