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Case of the Week: Fixing Fixed-Rate Cash Balance Plans

Case of the Week

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare. We bring Case of the Week to you to highlight the most relevant topics affecting your business.

Recently, we have received calls from advisors with a repeating concern related to cash balance plans. Their cash balance plan sponsor clients are asking, “Why are we being told we have to contribute much higher amounts to our cash balance plans than ever before?”

Highlights of the Discussion

This is a common concern among certain cash balance plans, and often comes with no warning or creative fixes from their current consultants. Our response is to ask about the plan’s rate of return in 2022 and explain why that is relevant to their required contributions. We start here because most cash balance plan sponsors have what we call a “fixed-rate” plan design, which is a design that promises a positive return (sometimes as high as 5%) every single year. When assets post double-digit investment losses, like many did in 2022, this design will result in unwelcome news of much higher required cash outlay to keep their plans funded.

We then explain there is a better approach to consider that can keep contributions (and deductions) more predictable. Enter the “market return cash balance” (MRCB) plan. Instead of designing a cash balance plan with a fixed interest rate, MRCB plans are designed to credit accounts with the actual investment return in the plan’s trust. This can make a huge difference in funding stability as illustrated next. 

In the following example, a sponsor has committed to a $100,000 annual contribution, and the plan has a design promising a 4% fixed interest rate of return. See the investment returns from 2016 to 2022 below, under Actual Return. 

The fix-rate design created a mismatch between the promised benefits and the assets backing them. To keep the plan funded, the contribution had to fluctuate year-to-year, as shown in the column second from the right. 

As a fixed-rate plan matures, one bad investment return year can have drastic consequences to the required funding levels. This often comes at an inopportune time. In this case, the -15% return in 2022 turned a $100,000 contribution into $226,000.

By contrast, look at the column on the far right. MRCBs, when designed correctly, can mitigate this problem and result in a smooth experience for plan sponsors.

Making the Switch

Advisors have asked us, how hard is it to switch from a fixed-rate design to MRCB design? It’s much simpler than one might expect. Plans often can either be amended or restated without the need to terminate the program. This affords sponsors minimal disruption.

While sponsors cannot reverse the 2022 underfunding problem they may be facing, they can move to an MRCB design prospectively. There are ways to smooth out the “make-up” contributions over time while the plan recovers.


Most plan sponsors of fixed-rate cash balance plans are facing a challenging funding result after negative 2022 returns. In some cases, this news has already been delivered, but others may not realize the problem for several months. Specifically, plans that are valued at the beginning of the year were measured on January 1, 2022, which is before the market loss. This means their 2022 contributions may be funding an outdated result, and this won’t be addressed until after a 2023 valuation is completed. For more information, please see the article, “Advantages to a Market Return Cash Balance Plan Design.”


Any information provided is for informational purposes only. It cannot be used for the purposes of avoiding penalties and taxes. Consumers should consult with their tax advisor or attorney regarding their specific situation. 

©2023, Retirement Learning Center, LLC. Used with permission.



All comments
Harvey Shifrin
3 months 2 weeks ago
While this author illustrates issues with required contributions in a fixed return CB plan, the real problem lies within the premise. A Cash Balance plan or any defined benefit plan should adopt a conservative investment approach that limits vulnerability to volatility. That she illustrates a range of investment returns of 29% (+14% to -15%) is the problem. Whereas a philosophy of maximizing returns over time is appropriate for a defined contribution plan, it is the antithesis as applied to any defined benefit plan. This is especially the case where the sponsor's objective is consistent contributions. Understand that any defined benefit plan is really a sinking fund--once you accumulate the desired amount (perhaps the §415 limit), you are done. There is no advantage to out-earning the assumptions. This leads to potential over-funding. Especially in the small plan market, where benefits are targeted to owners, the more simple solution is to design the plan to where the required contribution is less than (in this case) $100,000, but where $100,000 is included in the range of deductible contributions. In that case, you build a buffer as protection against market fluctuations. This also illustrates the confusion advisors have with the required contribution and the Principal Credit to the Hypothetical Account Balance--they are not the same. If your client wants wildly fluctuating contribution requirements, keep investing in the same manner as your 401(k) clients. You don't need to fix the Cash Balance Plan; you need to fix the investment plan.
Alex Kuhel
3 months 2 weeks ago
Not sure I agree with the first part of your statement. Most clients, in reality, do not invest for such a narrow possible return set. The figures in this chart are quite indicative of what I've seen in reality and not unrealistic for the last several years. Additionally, no matter how hard one tries, a client is never going to exactly hit a fixed interest rate every year. Why not have a design that provides a forgiving acceptable range?
Harvey Shifrin
3 months 1 week ago
You miss the point. As an advisor, you should advise for a less volatile investment approach. I don't suggest a client can hit a specific interest rate, but a 29% range of returns results in large swings. Also, you still have an issue in loss years. Again, there is no problem with a fixed interest rate that a better plan design and less volatile investment plan can't fix.
Alex Kuhel
3 months 1 week ago
I think in a perfect world, I somewhat agree, just pick very low performing, low volatility investments, and you can mitigate some of the problem. Thing is...clients often want higher returns, and are willing to take some risk to get them. But even in a "low risk" investment, if your plan promises 5% return on $1M.... a 1% positive return is a $40,000 shortfall. Why have a plan with that risk? And if the argument is that a client should set a 1-2% fixed rate....I don't think too many will go for that. Truth is, the showcased design will always result in lower contribution volatility, even if the swings are smaller than the example shown. Sounds good to me.
Harvey Shifrin
3 months 3 days ago
The premise is "fixing fixed-rate CB plans". I don't think, in our real world, they are broken. Just as you assert "clients often want higher returns", clients also want higher deductions and try to fly as close to the §415 limit as possible. Fixed-rate CB plans better suits that scenario than a market rate plan. This is especially the case where high returns could push the HAB above the §415 limit and where negative returns will result in higher contributions. Also, the example ignores that if the addition to the account balance is equal to the contribution that design exacerbates the problem stated. Why not educate and advise our clients of the appropriate investment strategy and design, instead of throwing a design against the wall and seeing if it fits? My point is that there is nothing wrong with a fixed-rate CB plan if you use it correctly and that this design works best for those trying to maximize contributions and avoid surprises.
Alex Kuhel
2 months 3 weeks ago
If a design is set up to hug the 415 limit, then applying an ICR cap takes care of that. Now you've protected against exceeding 415 and protect downside risk to 0% cumulative return. I agree that conservative investments work best, but that's not design, that's investment strategy. Using actual rate of return just allows for forgiveness when the investments stray left or right of the narrow fairway. Not sure if you practice...but I'm seeing real consequences of clients having very painful contributions this year because they lost double digits in 2022. If they had used this design from the beginning, they wouldn't be in that situation.