Recent reports indicate a surge in adoption of cash balance plans in recent years, particularly among smaller employers. What are NAPA Net readers seeing in their practices?
Cash balance plans certainly have made inroads – a full 80% of this week’s respondents say their current clients offer such a plan, and one reader even noted that they comprise 25% of their practice.
In fact, the number of new cash balance plans adopted by employers increased by 17% in 2015 – rising to 17,812 active plans – according to Kravitz’s “2017 National Cash Balance Research Report.” Kravitz also claims that cash balance plans now make up 34% of all defined benefit plans, up from just 2.9% in 2001, and that total plan assets have risen to $1.1 trillion.
Not surprisingly, most are quite enthusiastic about the plan design; “love ’em,” 45% said, while “like ’em” was the sentiment of another one in five. “If it weren't for the ridiculous PBGC premiums, these plans would relegate 401(k) plans to supplemental ways to save,” observed one reader. “They are a much sounder way to plan for retirement.”
The rest were split between those who said they didn’t know much about them, didn’t really have an opinion, and – “other.” As one reader noted, “They can be a good solution when they are the right fit. Typically not an option for larger plans because of the cost.” Another said, “They are appropriate for a very small segment of the market,” while another cautioned “More complex than meets the eye – for the advisor and the customer.”
Interest Growing?
Looking at the trendline, 45% of this week’s respondents said they had seen an uptick in interest/takeup over the past two years, while another one in five said they had seen that, but only among smaller employers. The rest with hadn’t seen that kind of interest, or – as one reader noted, “Interest maybe, but not utilization. Seemed more popular for discussion five years ago.” Another reader said that “General knowledge of cash balance plans is still spotty. We find interest only when we broach the subject.”
Forty-five percent of this week’s respondents say they “pitch” cash balance plans as a design alternative, while just over a third (35%) said they did so “only in certain situations,” and the rest simply responded “not generally.”
For those who said they pitched them in only certain situations, respondents offered a variety of examples, including:
- “Generally speaking for doctors’ groups.”
- “Attorney groups, DB plan sponsors that don’t shy away from complexity and have a small enough participant group and resources to allow for explanation.”
- “They are discussed with small business owners who to maximize their contribution and benefit. It is also discussed with small business owners looking for sizeable tax deduction.”
- “Smaller plans, one or two owners or key executives making a lot of money and need another tax advantaged vehicle.”
- “Companies with high employer contributions or closely held firms with high cash flow.”
- “We typically talk about them with smaller workforce and pass-through income entities. They are a great tax saving vehicle for the business owner.”
- “When one or more participants would like to have an annual addition in excess of the 415(c) limit, or the plan sponsor wants a deduction in excess of the defined contribution plan 404 limit.”
- “In cases that can handle the mandatory contribution with no problem.”
- “High earning owners who can/should be maxed out in the DC plan.”
- “Only those with consistent income, looking for $100k+ contributions. Typically these are small, privately owned companies with an older owner and younger employees.”
Other Comments
There were several comments on the importance of…
- “If you've got a good actuary, these plans are a piece of cake!”
- “We generally use a single outside actuarial firm (and it's not Kravitz).”
- “Advisors need to work with a strong TPA/Actuarial partner.”
As well as an assortment of other observations on the subject of cash balance plans:
- “Sure, life is good! Cash balance plans seem to be best for small business owners who have a great year or two of income, and have the cash to contribute.”
- “We may see a decrease in the utilization of cash balance plans if tax reform passes. We are having clients hold contributions currently to see what happens with the tax reform before fully funding their cash balance plans.”
- “When a sponsor is properly guided on how to fund a cash balance plan, the problems of traditional defined benefit plans are largely eliminated, and most of the benefits retained, while also disposing of many of the problems with participant-directed DC plans.”
- “We feel that Cash Balance plan are an essential part of planning for highly compensated individual in small businesses. The avoidance of the Medicare tax on higher income earners.”
- “Some plan sponsors (and their CPAs) interested in a Cash Balance Plan are holding off until they see what Trump does with tax rates.”
- “Very helpful when principals are of different ages or have different goals. Also when concerned with inflated and fluctuating lump sum distributions due to low interest rates.”
- “I feel like this is an area where I need to increase my knowledge because I have been noticing an uptick in the interest level regarding this option.”
Thanks to everyone who participated in our weekly NAPA Net reader poll!
Oh, and don’t forget to weigh in on topics for the NAPA 401(k) Summit – and check out SummiTalk! It’s not too soon to be thinking about – and planning for – the NAPA 401(k) Summit!
Check it (all) out at http://napasummit.org.
