Cash Balance Plans on the Rise

Art by Jacqueline Kaulfersch

Advisers who specialize in 401(k) plans may find a recent statistic intriguing. According to the “2017 Cash Balance Research Report” from actuarial firm Kravitz, an Ascensus company, new 401(k)plans increase at just 3% a year. But the research also points to a market that is booming, and proponents say it naturally complements 401(k)s: cash balance pension plans.

“[This is] the fastest-growing plan design in our industry—at 15% a year,” says Dan Kravitz, president of the firm, in Encino, California. His team has built about 800 of the plans.

Also called “hybrid”s, as they combine defined benefit (DB) plans with some defined contribution (DC) features, cash balance plans should appeal to advisers expert in the Employee Retirement Income Security Act (ERISA) who want to grow their business. They are qualified, therefore protected, yet allow pre-tax savings in “multiples” of what a 401(k) profit-sharing plan allows, says Stephen Lippman, director, at Bernstein Global Wealth Management, in New York City. “They call them ‘hybrid’ because everybody gets his own balance, and it doesn’t go up or down with interest rates [as it would in a DB plan],” he says.

The main customers for the plans are small businesses—typically “profitable professional service companies” such as law firms or independent medical groups, with a high ratio of owners to staff, Kravitz says. “They’re also a great way [for advisers] to get out of the HR [human resources] room and into the board room,” as they give access to company owners for potential wealth management work, he adds.

The plans’ benefits for such owners can be great. If, as a Bernstein study says, Americans should now save 20% annually to be retirement ready, high-earners must save significantly more than under a 401(k) and a profit-sharing plan. Moreover, many small-practice owners have put off saving, to invest in their business or pay off student loans, Lippman says. As they approach retirement, the plans let them “turbo-charge their saving. That’s the whole crux of why they’re popular.”

Advisers benefit, too, as cash balance plans can be lucrative, sources say. As with a 401(k) plan, the adviser helps design the portfolio and monitors its effectiveness, providing investment advice, Kravitz says.

Unlike with wealth management, “there are guaranteed contributions coming each year,” Lippman says. “A plan might start with $1 million and every year give you another million dollars. They grow much faster than other accounts.”

Advisers must be patient at the start, though, he adds. They may need to analyze, with an actuary’s help, the advisability of such a plan, possibly add an employee 401(k) to pass nondiscrimination testing and, in some cases, postpone full funding until the next September 15. “It’s a longer sales cycle before the money gets invested,” which can deter some advisers, Lippman says.

Advisers will continue to need an actuary’s aid, Kravitz says. “A good adviser typically has a firm he feels comfortable dealing with that he can introduce to his client and make part of the team. The adviser brings the innovative plan design idea. The actuarial firm does the design and annual administration, and must sign off on the annual tax return.”