http://www.blogtalkradio.com/the401kstudygroup/2014/10/10/cashing-in-on-cash-balance
Best - Jason
Wednesday, October 15, 2014
I'm on the Radio! Hear a 30 minute interview discussing Cash Balance Plans from 'The 401(k) Study Group'!
Last week I was lucky enough to be interviewed on the radio by Chuck Hammond of The 401(k) Study Group and we discussed Cash Balance plans. It is a continuation from the previous posting on this blog about Cash Balance plans. Hope you enjoy listening to it. Linked Here.
http://www.blogtalkradio.com/the401kstudygroup/2014/10/10/cashing-in-on-cash-balance
Best - Jason
http://www.blogtalkradio.com/the401kstudygroup/2014/10/10/cashing-in-on-cash-balance
Best - Jason
Wednesday, September 10, 2014
Cash Balance Plans - Simplified
So, what's all of this noise about this "new" kind of Retirement Plan that's all the rave, called a Cash Balance Plan and how do I 'Cash In'?
The following information is meant to be informative, while not necessarily all encompassing.
What is a Cash Balance Pension Plan?
A cash balance plan is a type of Defined Benefit (DB) plan that looks and feels like a Defined Contribution Plan (DC) such as a 401(k) or Profit Sharing Plan. However, just because it looks like a DC plan doesn't mean that it is one, in fact it has more similarities to its' brother the traditional DB pension than it does to its' cousin the 401(k) Plan. Like traditional DB plans, Cash Balance plans are backwards-looking in that that they guarantee a determinable benefit to eligible participants and use annual contributions plus investment earnings to get to that end benefit at some later date.
What do you mean it looks/feels like a DC plan?
The allocation formula and the promised benefit are stated as a hypothetical account balance. They are hypothetical because they do not reflect the actual contributions to and gains/loses allocatable to the account. Rather they are attempting to give the participant a fair estimate of what their "balance" is in the plan. Realistically, the benefit they receive is the predetermined balance defined by the plan that won't be achieved until that participant reaches retirement age.
How does it work?
Like all DB plans, the investments are pooled and set up in a trust, allowing for economies of scale to be gained on investment expenses and eliminated the need for "daily valued" record keeping. Also like other DB plans, these plans are tax-qualified under the IRC and governed under ERISA . They are required to have fiduciaries in charge, namely the Plan Sponsor, Trustee and Plan Administrator and require the use of an Actuary. Many of these functions can be outsourced as well.
In a typical cash balance plan, each participant's hypothetical account is comprised of two parts; the pay credit and the interest credit. The pay credit is typically a fixed amount (such as $25k/year) or a fixed percentage of compensation, like 5% for example. The interest credit is either a fixed or variable rate linked to an index, such as the 30-Year Treasury.
These contributions are made annually and invested. The earnings on investments ought to be engineered to achieve the Interest Credit as a return, no more no less. The goal most often associated with Cash Balance plans is to maximize tax deductible contributions for the owners, key personnel and highly paid group. Unlike DC plans, however, contribution amounts from year to year can be theoretically unlimited since the contributions over time must equal what is needed to finance (fund) the promised benefit. This allows contributions to often go well north of the DC Plan 415 limit of $52,000. Often these contribution amounts could near $200,000/year for an individual person.
Who would use a Cash Balance Plan and why?
Cash Balance plans are popular among companies that are very rich in revenue while maintaining a fairly low number of employees. Employers such as law firms, professional groups, CPA firms and medical practices come to mind. These business' often have strong cash flows historically and prospectively, large budgets, relatively low numbers of employees where most of them are making substantial wages (north of $125k for example), have multiple owners or partners, max out on DC contributions and have mostly an older highly paid workforce.
What about costs and other barriers?
The main costs associated with Cash Balance plans are the contributions themselves since they tend to be much higher and are employer funded plans. Administrative costs are typically not more burdensome than other plan administrative expenses and sometimes less. Investment expenses are typically low due to the need to pool investments in a trust and the conservative nature of the investing. Cash Balance plans can be for any type of employer, however, note that they must be contributed to for a minimum of three years.
Hopefully, this was helpful in explaining some of the main points about Cash Balance plans. Obviously, this was an overview. If anyone has questions, they can comment on this post or reach me directly at jason.grantz@unifiedtrust.com.
The following information is meant to be informative, while not necessarily all encompassing.
What is a Cash Balance Pension Plan?
A cash balance plan is a type of Defined Benefit (DB) plan that looks and feels like a Defined Contribution Plan (DC) such as a 401(k) or Profit Sharing Plan. However, just because it looks like a DC plan doesn't mean that it is one, in fact it has more similarities to its' brother the traditional DB pension than it does to its' cousin the 401(k) Plan. Like traditional DB plans, Cash Balance plans are backwards-looking in that that they guarantee a determinable benefit to eligible participants and use annual contributions plus investment earnings to get to that end benefit at some later date.
What do you mean it looks/feels like a DC plan?
The allocation formula and the promised benefit are stated as a hypothetical account balance. They are hypothetical because they do not reflect the actual contributions to and gains/loses allocatable to the account. Rather they are attempting to give the participant a fair estimate of what their "balance" is in the plan. Realistically, the benefit they receive is the predetermined balance defined by the plan that won't be achieved until that participant reaches retirement age.
How does it work?
Like all DB plans, the investments are pooled and set up in a trust, allowing for economies of scale to be gained on investment expenses and eliminated the need for "daily valued" record keeping. Also like other DB plans, these plans are tax-qualified under the IRC and governed under ERISA . They are required to have fiduciaries in charge, namely the Plan Sponsor, Trustee and Plan Administrator and require the use of an Actuary. Many of these functions can be outsourced as well.
In a typical cash balance plan, each participant's hypothetical account is comprised of two parts; the pay credit and the interest credit. The pay credit is typically a fixed amount (such as $25k/year) or a fixed percentage of compensation, like 5% for example. The interest credit is either a fixed or variable rate linked to an index, such as the 30-Year Treasury.
These contributions are made annually and invested. The earnings on investments ought to be engineered to achieve the Interest Credit as a return, no more no less. The goal most often associated with Cash Balance plans is to maximize tax deductible contributions for the owners, key personnel and highly paid group. Unlike DC plans, however, contribution amounts from year to year can be theoretically unlimited since the contributions over time must equal what is needed to finance (fund) the promised benefit. This allows contributions to often go well north of the DC Plan 415 limit of $52,000. Often these contribution amounts could near $200,000/year for an individual person.
Who would use a Cash Balance Plan and why?
Cash Balance plans are popular among companies that are very rich in revenue while maintaining a fairly low number of employees. Employers such as law firms, professional groups, CPA firms and medical practices come to mind. These business' often have strong cash flows historically and prospectively, large budgets, relatively low numbers of employees where most of them are making substantial wages (north of $125k for example), have multiple owners or partners, max out on DC contributions and have mostly an older highly paid workforce.
What about costs and other barriers?
The main costs associated with Cash Balance plans are the contributions themselves since they tend to be much higher and are employer funded plans. Administrative costs are typically not more burdensome than other plan administrative expenses and sometimes less. Investment expenses are typically low due to the need to pool investments in a trust and the conservative nature of the investing. Cash Balance plans can be for any type of employer, however, note that they must be contributed to for a minimum of three years.
Hopefully, this was helpful in explaining some of the main points about Cash Balance plans. Obviously, this was an overview. If anyone has questions, they can comment on this post or reach me directly at jason.grantz@unifiedtrust.com.
Brokerage Windows in 401k Plans: Get Off the Beach!!!
Linked below is a really nice Op-Ed on Brokerage Accounts as pertains to using in 401(k) Plans. Really like the analogy regarding foolish people on a beach during Hurricane Sandy. The author does a nice job of explaining the issue in a non-technical way. Enjoy.
http://www.employeefiduciary.com/brokerage-windows-in-401k-plans/
http://www.employeefiduciary.com/brokerage-windows-in-401k-plans/
Monday, July 7, 2014
Discretionary Trustee vs. Inv. Mgr. or other fiduciary roles
An old colleague and current competitor of mine, and ours at my firm recently put out a very nice blog post articulating some of the nuances of the trustee role in context vs. other fiduciary roles, Investment Managers and directed trustees. Certainly worth a quick read, linked here.
http://pentegra.com/expertise/current-thinking/misconceptions-about-the-three-principal-fiduciary-roles-in-a-retirement-plan-the-trustee.aspx
Enjoy!
Jason
http://pentegra.com/expertise/current-thinking/misconceptions-about-the-three-principal-fiduciary-roles-in-a-retirement-plan-the-trustee.aspx
Enjoy!
Jason
Wednesday, June 25, 2014
Curbing Enthusiasm for 401(k) Plan Loans
Here are some friendly tips for employers when considering the loan provisions available in the 401(k) Plan they offer to their employees. Enjoy!
SITUATION:
We allow our employees to borrow against their 401(k) plan account balances. We understand that the ability to take out a loan can reassure employees that they have access to their account assets if they need them and can increase plan participation and contribution rates. However, we have to spend time and money administering the loans. And we’re concerned our employees may be hurting their chances for a comfortable retirement by borrowing too much and too often.
QUESTION:
Other than not offering loans, what can we do to discourage employees from taking unnecessary plan loans?
ANSWER:
You can take a number of actions to limit plan loans, including educating employees about the pitfalls of plan loans and placing restrictions on loans.
DISCUSSION:
Eliminating plan loans entirely might hurt plan participation. Instead, to discourage employees from taking plan loans they may not really need, provide information about both the advantages
and disadvantages of borrowing from a 401(k) plan account. While employees may already know about the ease and convenience of plan loans, they might not be aware that:
- Loan repayments are made with after-tax money.
- Taxes will be paid again when the money is distributed from the plan.
- It can be difficult to continue to save for retirement and pay back a loan.
- If they leave employment, loans generally must be repaid at that time.
- If a loan isn’t repaid, the outstanding balance would be treated as a taxable withdrawal subject to both income tax and a possible 10% early withdrawal penalty.
Before processing a loan request, provide employees with a summary of the potential disadvantages of a plan loan. Other actions you can take to discourage excessive loans include:
- Limiting the number of outstanding loans an employee can have at one time.
- Limiting the number of loans an employee can take in a 12-month period.
- Restricting borrowing to only money that the employee has contributed.
- Increasing the loan origination fee.
To potentially reduce the number of loan defaults, arrange for repayment to be made through payroll deductions or automatic checking account deductions.
Thursday, June 19, 2014
Not all 3(38) Fiduciaries are alike - Repost
Pulled this brief blog post from Ary Rosenbaum's blog. Linked below.
http://www.jdsupra.com/legalnews/not-all-338-fiduciaries-are-alike-01959/
In this post Ary discusses one of the current industry trends, the selling of 3(38) services and discusses briefly how they come in different shapes and sizes and he equates many of these new services to getting a meal at McDonald's. Love his sarcasm.
About 18 months ago, I authored a paper on this topic as well. It has many of the same themes as Ary's post, but goes a bit deeper into the topic. Below is a link to that paper. Enjoy!
https://www.unifiedtrust.com/documents/Third-Party-Fiduciaries-Myth-and-Reality.pdf
http://www.jdsupra.com/legalnews/not-all-338-fiduciaries-are-alike-01959/
In this post Ary discusses one of the current industry trends, the selling of 3(38) services and discusses briefly how they come in different shapes and sizes and he equates many of these new services to getting a meal at McDonald's. Love his sarcasm.
About 18 months ago, I authored a paper on this topic as well. It has many of the same themes as Ary's post, but goes a bit deeper into the topic. Below is a link to that paper. Enjoy!
https://www.unifiedtrust.com/documents/Third-Party-Fiduciaries-Myth-and-Reality.pdf
Friday, June 13, 2014
Participants Still Need Basic Retirement Plan Education
In a June 12, 2014, PLANSPONSOR.com article – They write that 401(k) plan
participants still do not understand some of the basics about saving and
investing in their plans as suggested by an recent survey. The survey is authored by MFS Investment Management. Complete article linked here.
According to MFS Investment Management’s (MFS) 2014 DC
Pulse survey, nearly
three-quarters (74%) of participants say having a little bit invested in each
option of a 401(k) plan is the best way to diversify. More than
20% say they have no idea how best to diversify a retirement account.
More than half (52%) of 401(k) participants are not
aware of the tax impact on take-home pay from a contribution of $100, and
nearly half (46%) say they believe the money saved in their retirement plans is
a good source of funding for other financial needs, like paying off debt or
saving for college.
The survey finds participants often contribute just enough to receive the
maximum employer match, and nearly one-quarter (23%) of plan
participants surveyed indicate they believe there is no additional benefit to
contributing more than is necessary to receive the employer matching
contribution. The number jumps to 37% among Generation Y respondents (younger
than age 34).
More than one-third (37%) of
survey respondents say a major drop in the stock market poses the greatest risk
to their retirement savings—not contribution amounts or behaviors. Only 8% base plan contributions
on projected retirement needs and goals, while 46% contribute what they
feel they can currently afford. Only 17% believe the amount of time they are
invested has the greatest favorable impact on their retirement account balance,
and just one in four know early withdrawals may lead to tax penalties.
65% of survey respondents incorrectly believe index funds are safer
than the overall stock market, and nearly
half (49%) believe index
funds have better returns than the stock market.
These statistics are startling, albeit not surprising to many industry practitioners. I believe this makes a clear case for an option within the system engineered to do everything for the participant (not target date funds). Automate an appropriate savings rate, escalate that rate over time, professionally asset allocate and asset select for the participant, adjust as needed and define an endpoint retirement age that will be the target. This system should be the prevailing system, just a thought.
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