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Cash Balance Plans Continue Solid Growth, Report Finds

Surpassing industry projections, the number of new cash balance plans adopted by employers increased by 17% — rising to 17,812 active plans — in 2015, the most recent year for which complete IRS Form 5500 data is available, according to new research by Kravitz, Inc., an Ascensus company.

Kravitz’s “2017 National Cash Balance Research Report” notes that after more than a decade of double-digit annual growth, cash balance plans now make up 34% of all defined benefit plans, up from just 2.9% in 2001. Plan sponsors also made a “record-setting” $29.3 billion in cash balance plan contributions in 2015, with total plan assets rising to $1.1 trillion.

PPA Paved the Way

The 2006 Pension Protection Act helped paved the way for the growth of cash balance plans by clarifying their legality. More than 75% of existing cash balance plans were established within the past nine years, and while many still have assets under $500,000, this will shift over the next decade as business owners seek to maximize tax-deferred savings for themselves and optimize tax-efficient contributions to employees, according to the report.

“Cash balance plans offer considerable advantages for employers, including the opportunity to double or triple tax-deferred retirement savings,” Dan Kravitz, head of Kravitz, said in releasing the report. “Cash balance plans are also very appealing to employees, and can help companies attract top talent in a tight labor market,” he added.

Among the key findings are that small business continues to drive cash balance plan growth, but an increasing diversity of companies are also adopting cash balance plans. The report shows that 92% of cash balance plans are sponsored at firms with fewer than 100 employees. While medical/dental groups and law firms still make up almost half the market, the plans are becoming increasingly popular across the business sector, from technology to retail and manufacturing.

In addition, the report finds that companies nearly double contributions to employee retirement savings when combining a cash balance plan with a 401(k) plan. The average employer contribution to employee accounts is 6.6% of pay in companies with both cash balance and 401(k) plans, compared with 3.7% of pay in firms with only a 401(k).

As for what’s driving the growth, the report suggests that IRS regulations allowing broader investment options have accelerated the pace. The ‘Actual Rate of Return’ option and other new investment choices authorized in 2010 and 2014 IRS regulations provided more flexibility for employers and removed certain funding issues, Kravitz explains. As a result, the number of large plans using Actual Rate of Return increased by 17% last year, according to the report.