Wealth Strategy Insights

The Soaring Popularity of Cash Balance Pension Plans

29 October 2018

Many business owners and entrepreneurs, having recovered from setbacks during the 2008 financial crisis, are now seeking ways to maximize their retirement plan savings during what has now become one of the longest bull markets in U.S. history.

Cash balance pension plans have soared in popularity in response to those needs—and thanks to clearer guidance issued by the IRS in 2010. 

Specifically, the period 2010-2016 saw a 290% increase in new cash balance pension funds, leading to total assets  
of more than $1 trillion by the end of 2016 (the last full year for which data is available from the Department of Labor), according to the Kravitz 2018 National Cash Balance Research Report.

Here’s more context for their growth in popularity, also from Kravitz data: 

  • The number of new cash balance plans increased by 15% from 2015 to 2016 compared to an increase of only 1% in new 401(k) plans from 2015 to 2016
  • More than $38 billion in annual contributions flowed into cash balance pension funds in 2016

So who’s using cash balance pension plans?

While some Fortune 500 companies have converted their traditional pension plans to a cash balance format, small and medium-sized businesses have contributed most to the recent popularity of these plans.

These plans are ideally suited for businesses that have consistent cash flow and are highly profitable.


Companies with 100 employees or less now represent 92% of all cash balance pension plans, and nearly 57% of all cash balance plans are sponsored by employers with fewer than 10 employees.



What exactly is a Cash Balance Plan?

First introduced in the mid-1980s, these plans were used sparingly and didn’t catch on until certain legal issues were clarified in the 2006 Pension Protection Act, 2010 IRS Cash Balance regulations and 2014 Final IRS Cash Balance regulations.  

Cash Balance Pension Plans are employer-sponsored retirement plans that incorporate elements from traditional defined benefit plans along with the flexible characteristics of defined contribution plans (401k).  These hybrid plans provide the ability for high income business owners and partners in professional service firms to save upwards of $261,000 annually based upon demographics and plan design.

Similar to traditional defined benefit plans, employers make contributions for the benefit of each employee.  However, instead of using an actuarial rate of return, the employer makes two contributions for each employee.  The first is a pay credit, which is either a fixed amount or a percentage of annual compensation.  The second contribution is an interest credit rate (ICR) which is typically set to equal the actual rate of return of the portfolio, thereby reducing the investment risk of market volatility and the possibility of having an underfunded plan.

Another defining difference is that a hypothetical account is maintained for each employee.  Contributions are recorded into these accounts, providing the employee with the ability to understand their benefit as a hypothetical account balance, similar to a 401(k) account, instead of a specific monthly benefit upon retirement.

To maximize their effectiveness, 96% of cash balance pension plans are combined with 401(k), profit sharing and other defined contribution plans. This allows for plans that are maximized for the benefit of the business owner while also helping to recruit and retain employees.

Benefits of cash balance pension plans

  • Not all participants are equal – plans can be designed to maximize benefits to owners, while minimizing contributions to other employees.  Since contributions are age-based, older business owners may be able to contribute as much as $261,000 annually and reap upwards of 90% of the benefits of the plan.
  • Income tax reduction strategies – contributions to retirement plans reduce your taxable income dollar for dollar.
  • Asset protection – all qualified pension plans are protected under the Employee Retirement Income Security Act of 1974 (ERISA).  The ability to accumulate large sums makes these plans particularly attractive to doctors, lawyers and entrepreneurs.
  • Eliminate the potential of an under funded pension liability – regulatory revisions allow the plan’s ICR to equal the plan’s actual rate of return, thereby eliminating a plan’s ability to be underfunded due to market declines.  The plan’s assets must be adequately diversified.
  • Federal guarantee – as with all pension plans, cash balance plans can be guaranteed by the Pension Benefit Guaranty Corporation for a nominal fee.
  • Portability and value – IRS regulation allows for a maximum accumulation of $2.9 million at age 62 with at least 10 years of participation before and/or after 2019.  After a 3-year vesting period, account values can be rolled over to an Individual Retirement Account (IRA) or a lifetime annuity can be purchased. Knowing the market value of your retirement benefit makes planning more meaningful and easier to understand.

Is a cash balance plan right for you?

Cash balance pension plans represent an opportunity for business owners to take advantage of enhanced tax savings, maximizing their retirement savings and protecting their assets. They have changed the landscape of retirement planning, especially as their popularity has soared.

Because all qualified retirement plans are subject to a myriad of regulatory issues, we recommend engaging a qualified third-party actuary to design a plan to meet your needs.

Calamos Wealth Management and its representatives do not provide accounting, tax or legal advice. 
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