Offered Cash Balance Plan - RED FLAGS? (physician)

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fundtalker123
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Offered Cash Balance Plan - RED FLAGS? (physician)

Post by fundtalker123 »

Wife's employer, a large physician group, is considering offering a "Cash Balance Plan" and wants employee feedback.

I've read previous posts on this topic, but need feedback on the specific plan.

- Allows more pre-tax savings on top of $52k (401k+profit sharing) limit. Vaguely stated to be up to ~$83k-$230k depending on age, income, etc,

- Appears to allow tax-deferred investment with rollover to IRA upon retirement, possible reduction of tax-bracket due to reduced income, and possible lower tax rates upon withdrawl (if income were lower then).

RED FLAGS I'm seeing so far:

- Specific plan is: http://cashbalancedesign.com/index.html
All assets invested in "Payden/Kravitz Cash Balance Plan Fund", which has a HUGE management fee of 1.5%. http://cashbalancedesign.com/planinvestments/index.html

- Fund is stated to attempt to achieve a "conservative" return of 5% (glossy brochure), but on deeper investigation aim is to achieve a return equal to the 30-year treasury yield, previously ~5%, but currently ~3.2%.

- They are obviously aiming to achieve a return of 3.2% + 1.5% (fee), and to do this they need to invest in assets MUCH riskier than 30-year treasuries, stated to be "corporate, mortgage, and emerging-market debt along with other cash-flow oriented securities", including "futures contracts". This sounds very worrisome to me - Right?

- It is supposedly guaranteed upon withdrawl that no participant will receive less than the total of their contributions. (i.e. "0% return" is guaranteed). However the way this is guaranteed is that if there are any losses the company would have to make contributions to make up the difference. I think this is not as good as it sounds -- if the physician group had to make contributions, this would reduce profit, and thus directly reduce physician salaries and bonuses - there is no such thing as a free lunch - Right?

I'm leaning towards advising her to OPPOSE this plan.
dhodson
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Re: Offered Cash Balance Plan - RED FLAGS? (physician)

Post by dhodson »

The main question is who pays for the plan. Does it come from her salary or this from the company in addition to her salary. Sounds like the former. If so then this isn't such a good deal for you bc of the huge fees associated with it.

In general these plans are good for older folks who have fewer years until retirement. The main reasons being that you are allowed to contribute more per year and you have fewer years to pay all those expensive fees.

What the plan invests in is just like anything else. If its high fee products then it costs more (more of a problem if you are paying for it). If it invests within very conservative things then you likely aren't taking enough risk and in the end will again pay too much.

I imagine there is a partner or two who is senior/older who is pushing this.

A cash balance plan is just a defined benefit plan. Most of the retirement plans you think of such as 401ks are defined contribution where they tell you the max you can put into the plan. This is the reverse where you that maximum you can receive is predetermined and the contribution comes from figuring out how to get there over x number of years. Its like saying you get a new car at retirement but you have to pay for it. What you want is to pay the least so don't get caught up in how much you can deduct from taxes.
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Re: Offered Cash Balance Plan - RED FLAGS? (physician)

Post by Grt2bOutdoors »

I vote to pass.

If you could get 3.5% on a 20 year Treasury (EE savings bond yields 3.5% though annual limit is only $10K and has other limitations that may make it undesirable to hold for someone who may be in highest earning years at liquidation), no risk why would you place your money at risk to receive a lower return on a 30 year security?
A 1.5% expense ratio in a low return world - if the 30 year treasury yields 3.2%, why would you pay more than half the return in the form of expenses to manage your money? You could just by the 30 year treasury in an IRA.

I agree with Dhodson - this sounds like someone senior is seeking to lower their gross income by deferring income.
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fundtalker123
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Re: Offered Cash Balance Plan - RED FLAGS? (physician)

Post by fundtalker123 »

dhodson wrote:The main question is who pays for the plan. Does it come from her salary or this from the company in addition to her salary. Sounds like the former. If so then this isn't such a good deal for you bc of the huge fees associated with it.
I believe it would be mainly from her salary, but the return of principle guarantee (0% lowest return) has to be guaranteed by company contributions if needed. But since any company contributions would come out of company profit, I think this would directly lower salaries and bonuses, right?
dhodson
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Re: Offered Cash Balance Plan - RED FLAGS? (physician)

Post by dhodson »

Correct for the most part. I supposed some partner could say he/she will cough it up if needed but that isn't likely.

The sad part is I bet the senior partners don't realize they could do a lot better. They probably are overly focused on the tax deduction and don't realize this just means more cost to them as well.
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Re: Offered Cash Balance Plan - RED FLAGS? (physician)

Post by randomguy »

Grt2bOutdoors wrote:I vote to pass.

If you could get 3.5% on a 20 year Treasury (EE savings bond yields 3.5% though annual limit is only $10K and has other limitations that may make it undesirable to hold for someone who may be in highest earning years at liquidation), no risk why would you place your money at risk to receive a lower return on a 30 year security?
A 1.5% expense ratio in a low return world - if the 30 year treasury yields 3.2%, why would you pay more than half the return in the form of expenses to manage your money? You could just by the 30 year treasury in an IRA.

I agree with Dhodson - this sounds like someone senior is seeking to lower their gross income by deferring income.
There are 2 questions
a) Are cash balance plans good? Sure assuming you don't mind holding that much money in bonds and your company has the cash flow to fund them. For high income people (i.e. the ones investing in taxable after putting 52k into an 401(k) is very valuable for holding bonds and if you go from paying 35% when working to 20% when retired, you get a nice tax savings bonus.

b) Is that fund a good idea? I am guessing a standard 25/75 fund would be a better option but it is all about the details.
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swimirvine
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Re: Offered Cash Balance Plan - RED FLAGS? (physician)

Post by swimirvine »

It sounds like something we had. It was a defined benefit plan but each doctor agreed that they would roll out their individual money when the left the group in a lump sum into a roll over IRA.

You can get a private pension company to write you a much more favorable plan. You can have the plan allow each participant house their account at their own broker (as long as they support non-prototype FBO accounts ... i.e. Fidelity = yes; Vanguard = no).

The amount you can put in is calculated each year by an actuary at the pension company.

It sounds like this company wants to write the plan and manage all the investments with no other options.

We ditched this plan for a regular profit sharing 401(k) because you run the risk of one participant losing all their money in the stock market and technically the larger group would be on the the hook for providing the minimum benefit to the participant if they left the group.
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ERISA Stone
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Re: Offered Cash Balance Plan - RED FLAGS? (physician)

Post by ERISA Stone »

The cash balance contribution comes from the employer. I assume they are offering a 401(k) as well but your wife doesn't have to make a contribution to a CB to benefit. It's a free benefit to her. Unless you are making the claim that her increased benefit in the CB plan will reduce her benefit in 401(k) or salary, why would you oppose this? Is she one of the partners?

Also, does the 1.5% fee include benefit calculations and the necessary government forms that must be signed by an actuary? I would imagine the plan would cost $5k-10k annually to administer just based on the calculations and forms.

Also, it's been a while since I've administered a combo plan, but I believe the company would be required to provide higher minimum profit sharing contribution (I think 7.5% minimum compared to 5% minimum in new comparability profit sharing - assuming that's what the company has) if the physicians have the 401(k)/CB combo.
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Re: Offered Cash Balance Plan - RED FLAGS? (physician)

Post by fundtalker123 »

ERISA Stone wrote:The cash balance contribution comes from the employer. I assume they are offering a 401(k) as well but your wife doesn't have to make a contribution to a CB to benefit. It's a free benefit to her. Unless you are making the claim that her increased benefit in the CB plan will reduce her benefit in 401(k) or salary, why would you oppose this? Is she one of the partners?
I think the reasons I'm opposed are:

1. The specific management company and fund being offered have very high fees, and I believe it is likely that a different company probably offers much better options in terms of lower management fee and lower fund fees. I imagine the fee could be <0.1% management fee, and <0.1% fund fee (using index funds), rather than 1.5%

2. It seems possible to me that even if the plan is optional, and you don't join it, it could still "hurt you" if many others join and the fund experiences losses and has to be "bailed out" by physician group payments, because this would reduce profits and thereby reduce salaries and bonuses even for those who didn't sign up for the plan! (am I wrong here?)
ERISA Stone
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Re: Offered Cash Balance Plan - RED FLAGS? (physician)

Post by ERISA Stone »

fundtalker123 wrote:
ERISA Stone wrote:The cash balance contribution comes from the employer. I assume they are offering a 401(k) as well but your wife doesn't have to make a contribution to a CB to benefit. It's a free benefit to her. Unless you are making the claim that her increased benefit in the CB plan will reduce her benefit in 401(k) or salary, why would you oppose this? Is she one of the partners?
I think the reasons I'm opposed are:

1. The specific management company and fund being offered have very high fees, and I believe it is likely that a different company probably offers much better options in terms of lower management fee and lower fund fees. I imagine the fee could be <0.1% management fee, and <0.1% fund fee (using index funds), rather than 1.5%

2. It seems possible to me that even if the plan is optional, and you don't join it, it could still "hurt you" if many others join and the fund experiences losses and has to be "bailed out" by physician group payments, because this would reduce profits and thereby reduce salaries and bonuses even for those who didn't sign up for the plan! (am I wrong here?)
I assume the fees mentioned cover the necessary administrative requirements of a pension plan. I could be wrong but I assume that for now. DB plans are not cheap and you can't compare the costs of one to a 401(k) plan. They are different animals. However, your wife would be getting a benefit that she would not otherwise receive. Serious question - what makes you think the owners would take the funds they were going to use for the CB plan and give it to her as salary or some other benefit otherwise? I don't know many owners that operate that way. OTOH, I don't know a lot of owners who would really care about the non-owners opinion on something like this so maybe they're a bit different.

The way this plan will likely work is - your wife's company currently has a 401k plan that allows the owners to receive the maximum profit sharing contribution while providing a minimum profit sharing contribution to the employees (probably 5% of nondiscrimination testing passes). When you add the CB plan, there is a similar benefit calculation but it also causes the owners to have to increase the profit sharing contribution to employees.

This link might be more helpful in helping you understand the benefit to your wife - http://www.benetechinc.com/default.asp?contentID=12
staythecourse
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Re: Offered Cash Balance Plan - RED FLAGS? (physician)

Post by staythecourse »

No offense and not to be cynical, but don't think it matters what you or your wife think.

If she works for a big employer it ONLY matters how seducible the one calling the shots in HR or on the benefits committee is to the financial advisors pitching the product. If you have questions/ reservations I would direct them not here, but find the person who is calling the shots. The sad thing is those who are calling the shots seem to know A LOT less then the ones they are supposed to be representing!

If she is in a large physician group as a rank and file employee I doubt it will matter what she thinks. The goal of these organizations is to separate the physician from the management of the company for better or worse.

Good luck.
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dhodson
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Re: Offered Cash Balance Plan - RED FLAGS? (physician)

Post by dhodson »

Just as a for instance they could have one created via Schwab for a lot cheaper

Now there likely would be less hand holding as well.

I am a physician and have my own 401k/ps with a defined benefit plan. If I had to do it all over again, I would have just done the 401k/ps or a Sep ira until I was in my 50s and then start a DB plan. I am the only employee for my company.
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Re: Offered Cash Balance Plan - RED FLAGS? (physician)

Post by fundtalker123 »

ERISA Stone wrote:
fundtalker123 wrote:
ERISA Stone wrote:The cash balance contribution comes from the employer. I assume they are offering a 401(k) as well but your wife doesn't have to make a contribution to a CB to benefit. It's a free benefit to her. Unless you are making the claim that her increased benefit in the CB plan will reduce her benefit in 401(k) or salary, why would you oppose this? Is she one of the partners?
I think the reasons I'm opposed are:

1. The specific management company and fund being offered have very high fees, and I believe it is likely that a different company probably offers much better options in terms of lower management fee and lower fund fees. I imagine the fee could be <0.1% management fee, and <0.1% fund fee (using index funds), rather than 1.5%

2. It seems possible to me that even if the plan is optional, and you don't join it, it could still "hurt you" if many others join and the fund experiences losses and has to be "bailed out" by physician group payments, because this would reduce profits and thereby reduce salaries and bonuses even for those who didn't sign up for the plan! (am I wrong here?)
I assume the fees mentioned cover the necessary administrative requirements of a pension plan. I could be wrong but I assume that for now. DB plans are not cheap and you can't compare the costs of one to a 401(k) plan. They are different animals. However, your wife would be getting a benefit that she would not otherwise receive. Serious question - what makes you think the owners would take the funds they were going to use for the CB plan and give it to her as salary or some other benefit otherwise? I don't know many owners that operate that way. OTOH, I don't know a lot of owners who would really care about the non-owners opinion on something like this so maybe they're a bit different.

The way this plan will likely work is - your wife's company currently has a 401k plan that allows the owners to receive the maximum profit sharing contribution while providing a minimum profit sharing contribution to the employees (probably 5% of nondiscrimination testing passes). When you add the CB plan, there is a similar benefit calculation but it also causes the owners to have to increase the profit sharing contribution to employees.

This link might be more helpful in helping you understand the benefit to your wife - http://www.benetechinc.com/default.asp?contentID=12
It seems obvious that the plan fees and fund fees consist of two components: (1) the actual cost to manage, plus (2) profit for the management and fund firms. I expect that different firms will differ significantly in terms of part (2), e.g., Merrill Lynch funds charge higher fees than Vanguard Funds.

Regarding the situation where the fund loses money and the physician group has to make contributions to make sure investors withdrawing don't lose money, it is clear that these contributions must come out of overall profits of the group. This is a large physician group with hundreds of physicians, most of whom are "partners". Most of the profits are either reinvested in capital or payed out as salary and bonuses to the physicians. Anything that reduces profit overall will logically impact salaries and bonuses.
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Re: Offered Cash Balance Plan - RED FLAGS? (physician)

Post by fundtalker123 »

staythecourse wrote:No offense and not to be cynical, but don't think it matters what you or your wife think.

If she works for a big employer it ONLY matters how seducible the one calling the shots in HR or on the benefits committee is to the financial advisors pitching the product. If you have questions/ reservations I would direct them not here, but find the person who is calling the shots. The sad thing is those who are calling the shots seem to know A LOT less then the ones they are supposed to be representing!

If she is in a large physician group as a rank and file employee I doubt it will matter what she thinks. The goal of these organizations is to separate the physician from the management of the company for better or worse.

Good luck.
Sounds about right. I just participated a web-seminar with the plan management company representative. Bunch of PPT slides that promised huge tax benefits but gave no actual specifics on investments and fees. I was able to type questions in a little chat box, and got incredibly vague answers, such as when I asked "What will the investment options be, and what will the fees be?" Answer: "Oh, that is to be determined later in consultation with a board of advisers, but the fees will be quite reasonable. The main question you need to answer first is 'do you want the cash management plan?'". Huh, how can one possibly answer that question without knowing how the money will be invested and what the fees will be? What a joke!

When I specifically asked about the only fund option mentioned on the firm's website and it's listed 1.5% fee, I was told "Oh, no ... we will not be using this fund in this case. The appropriate investments and fees will be determined later" (once you agree to go ahead with this???). Huh?!
dhodson
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Re: Offered Cash Balance Plan - RED FLAGS? (physician)

Post by dhodson »

As you realize, you aren't getting real information from them.

You also absolutely don't want to focus on the tax deductions. If you do then someone will actually convince you into something that will cost you even more for the same defined benefit. The worst way is to put insurance products within the plan. Google 412i white paper and look at the first response which is a PDF to understand that one shouldn't focus on the deduction.

It would be like me saying you can take me out to dinner to discuss work and deduct the cost so lets go to the most expensive restaurant possible. This will have the highest deduction. Of course you don't get anything special about that arrangement but it does save you on taxes through deductions.

I'd ask your group to start looking at Schwab's offering (which is likely a lot lower cost) and have them compare it to what is offered for costs. Now Schwab might not work for you bc of lack of hand holding for the group but possibly it will show your group how much more they are paying for their plan and investments and this can be part of the negotiations.
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Re: Offered Cash Balance Plan - RED FLAGS? (physician)

Post by White Coat Investor »

We have a cash balance plan. Fees are around 0.4-0.5%. The money is invested in solid mutual funds with reasonable ERs. When I separate or the plan is closed, I'll roll the money into the TSP. I love the idea, but like anything, execution matters. You wouldn't think mutual funds were great if your only options were 8% load, 2% ER, active funds would you?
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ERISA Stone
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Re: Offered Cash Balance Plan - RED FLAGS? (physician)

Post by ERISA Stone »

All benefits that an employer offers are paid through what would otherwise be potential profits. The liability of the CB plan is no different.
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