Skip to main content

You are here


How to Cash In on Cash Balance Plans: NAPA 401(k) Summit

Conferences & Events

Cash balance plans are hardly new, but they offer a unique combination of some of the best features of a traditional defined benefit pension plan with those of a defined contribution/401(k) plan—providing a solution that can maximize the benefits to small business owners well beyond what’s provided by the traditional 401(k). 

“An advisor at the reception last night created a new drink he called the Cash Balance Plan,” Justin Bonestroo said in a lighthearted start to last week’s NAPA 401(k) Summit session in San Diego on the topic. “His order had way too much vodka, and he looked for something to cut it with. All he had was red wine. He called it the Cash Balance Plan because it exceeded normal limits. I added that, like a Cash Balance Plan, it’s great for some, but not for everyone. I don’t think we’ll see him at any early sessions this morning.”

Bonestroo, Senior Vice President with CBIZ, was joined onstage by Russell Smith, a partner with Raleigh, N.C.-based Guardian Wealth Partners, for “Hybrid ‘Vehicle’: Cash Balance Plans—The Best of Both Worlds,” to outline the benefits of cash balance plans.

While attendees in the room were familiar with and worked with cash balance plans, they were looking for insight from someone with deep experience in the space, and Smith, with the 50 to 60 cash balance plans he’s installed, didn’t disappoint.

“If you’re a 401(k) guy, you always think you’ve got a prospect for a cash balance plan because you have the census, you know what their incomes are, and you can see really quickly whether they may or may not be a good candidate on paper, so you start there,” Smith said. “Our experience was that for every three presentations we did, probably one was a good fit.”

Bonestroo asked about the common mistakes and misunderstandings Smith sees advisors make when getting started in the cash balance area.

Smith said cash balance plans are (or can be) quite complicated. While not a problem for more experienced advisors, he sometimes sees newer advisors “speak out of turn” when explaining certain concepts and answering questions, which Bonestroo added that he also sees.

“I’ve been in more than one meeting when I’ve had to say, “That’s a great point, but it would be even more correct if …,’” he noted. “What we run into is just quickly answering questions that come up and not realizing that there are consequences and a lot of very nuanced areas in cash balance plans. On the other hand, and it might be even bigger, is that some try to keep the conversation so simple with the plan sponsor that you don’t get the value across of implementing one.”

Smith asked Bonestroo if an advisor must fully commit to the cash balance space or if they can dabble, the latter argued that the more committed and experienced the advisor is, the more successful they will be.

“You’ll be more equipped for some of those conversations,” Bonestroo added. “But you don’t have to be fully dedicated to the space. If you work with somebody who knows it well and relies heavily on them, you make sure you get it right.”

Smith concluded by emphasizing that advisors must divulge the good with the bad and the exciting aspects of cash balance plans with their more technical aspects.

“A lot of times, if the prospect has a passing notion of what these plans are, they’ve only heard the sizzle of the sale, all the good stuff,” he said. “It then becomes that old Paul Harvey quote about the rest of the story. It’s a fine line between divulging way too much on the front end, but we do step in and say, “Hey, here are some of the bear traps you need to be aware of,” and we’ll sometimes literally convince them not to put one in. After we’ve gone through all that, and they’re still sitting at the table, we know we have a solid prospect.”