Cash Balance Plan Question

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
Suprane
Posts: 1
Joined: Thu Feb 13, 2020 3:07 pm

Cash Balance Plan Question

Post by Suprane » Fri Feb 14, 2020 1:33 pm

Long time lurker, very grateful for all of the wisdom I've learned on Bogleheads over the years.

My medium sized physician group is considering opening a Cash Balance Plan is addition to our 401k/profit sharing plan to allow for increased pretax savings (we live in an high tax state). I've been reading extensively about cash balance plans, but one of the hallmarks of the plans seems to be the relatively fixed set interest rate ("interest crediting rate"). The plan must be funded to this return whether the fund actually meets the return or not, potentially requiring increased contributions in a market downturn. This can be particularly concerning were someone with a large contribution terminates their participation in the fund during a recession.

One administrator has suggested using a "actual rate of return" as the interest crediting rate which would obviate this issue, however I can't find much information on this and honestly it seems too good to be true. Is anyone familiar enough with cash balance plans to provide some insight into the risks of using actual rate of return?

Any advice or experiences with cash balance plans would be welcome as well. Though I have read a great deal about the plans (thank you WCI), but I still feel like there are some nuances which I don't fully grasp.

Thanks! :sharebeer

FactualFran
Posts: 1030
Joined: Sat Feb 21, 2015 2:29 pm

Re: Cash Balance Plan Question

Post by FactualFran » Fri Feb 14, 2020 4:15 pm

I don't have detailed information of what Cash Balance plans may do, but I am familiar with the approaches used by two previous employers. With one employer, the balance was credited at a rate that was changed annually based on the recent yield of certain U.S. Treasury securities. The employer was responsible for adding that money.

With the other employer, the balance was put in a trust fund that was professional managed. The balance was credited with an average of the actual returns over the prior five years. An average was used to avoid having the balance decrease at an inopportune time, such as when money was withdrawn from the plan.

User avatar
ICMoney
Posts: 296
Joined: Fri Oct 28, 2016 2:38 pm

Re: Cash Balance Plan Question

Post by ICMoney » Fri Feb 14, 2020 6:22 pm

Talk to a good pension actuary that works with cash balance plans regularly, not an administrator. The actuary should be able to explain the pros and cons of various cash balance plan designs to you in detail.

Best, ICM

User avatar
CalculatedRisk
Posts: 179
Joined: Tue Sep 11, 2018 8:04 pm

Re: Cash Balance Plan Question

Post by CalculatedRisk » Fri Feb 14, 2020 9:18 pm

Suprane wrote:
Fri Feb 14, 2020 1:33 pm
Any advice or experiences with cash balance plans would be welcome as well. Though I have read a great deal about the plans (thank you WCI), but I still feel like there are some nuances which I don't fully grasp.

I think my cash balance plan has both a floor and a limit, though I haven't really dug into it. The agreement says something like: "... the Participant's Accrued Benefit shall not be less than the sum of <all contributions> made on Participant's behalf and shall not exceed the lesser of (a) <maximum pension based on top 3 years salary> or (b) the amount that Participant's balance would be if the Trust assets earned a constant annualized rate of return equal to X.XX% per year."

ubermax
Posts: 1550
Joined: Tue Feb 11, 2014 2:19 pm
Location: Connecticut

Re: Cash Balance Plan Question

Post by ubermax » Sun Feb 16, 2020 2:20 pm

I agree with what ICM said earlier , contact a good TPA or consulting firm that has a lot of experience with plan design and specifically in your case with combo plans , they will most likely have or retain a pension actuary - the interest crediting rate is only one component and federal regulations outline a few different options but if the practice has both HCE's and non-HCE's then there will most likely be non-discrimination testing required .

There are many firms around the country that have experience in this area due to the fact that the K/CB combo has gotten very popular in recent years - I know Kravitz in California does a lot of these and they probably have offices around the country .

Good Luck !!

Post Reply