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.
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 An average was used to avoid having the balance decrease at an inopportune time, such as when money was withdrawn from the plan.
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."
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 !!