While defined benefit plans are declining overall, there is one outlier that is bucking the trend. Cash balance plans grew 16 times as fast as 401(k) plans in 2016 and went from making up 2.9% of all defined benefit plans in 2001 to comprising 37% of them by 2016.
Such growth is a sign that there is something that cash balance plans have right. If you serve clients that own businesses, you need to be paying attention. As their trusted advisor, it is your duty to stay abreast of the options available to them for their own retirement and that could benefit their company as a whole.
One of those options is cash balance plans. These plans are experiencing such rapid growth because of the great benefit that they provide to both employees and employers. Let me show you how.
How Cash Balance Plans Benefit Employees
They Are Simple
With most defined benefit plans, it’s nearly impossible for an employee to figure out how much of a benefit to expect in retirement. Because of this, it makes it hard for them to plan ahead. With a cash balance plan, showing benefits in the form of an account balance is right within an employee’s comfort zone and is much easier for them to understand.
They Are Portable
Cash balance plans are also much more portable than traditional defined benefit plans. When an employee separates from service, they can easily roll the account balance into an IRA or another employer-sponsored plan. Having a clear account balance also makes it easier for them to cash it out upon severing employment if that’s what they want to do.
They Have High Limits
Key employees and older workers are able to save more with a cash balance plan. This is important because those are the people that usually need to save for retirement the most. Whether they need more to maintain a high lifestyle or because retirement is just around the corner, the higher contribution limits available with a cash balance plan make it ideal for key and older employees.
They Carry Little Risk
With a 401(k) plan, employees have to choose their own investments and bear all of the risk. This can be difficult for workers to stomach, especially if they are inexperienced investors or have a low risk tolerance. With a cash balance plan, there is little to no investment risk, depending on the plan design.
How Cash Balance Plans Benefit Employers
Employees Like Them
As we saw above, employees like cash balance plans because they are easy to use and less risky for workers. Because of this, they appreciate them more than other defined benefit plans, which is a clear win for employers. If an employer is going to take the time and money to sponsor a retirement plan, they want the employees whom the plan is designed to benefit to actually like it.
They Are Flexible
Cash balance plans also provide added flexibility for their sponsors. Sponsors have the option of contributing either a percentage of pay or a flat dollar amount. They can also be combined with defined contribution plans, which can multiply the benefits.
They Benefit Owners
One of those benefits that is multiplied with a defined contribution plan is the contribution limits. Even alone, cash balance plans make it easy to increase benefits to the business owners and key employees while controlling the cost of benefits for others. This is vital for a business owner who is behind on retirement saving and has several employees.
They Provide Control
If there’s one thing that can be said of entrepreneurs, it’s that they like to be in control. Luckily, a cash balance plan provides greater control over investment strategy than other employer-sponsored retirement plans. Your clients worked hard for that money and they like to have a say in how it is invested, even after it is in a retirement plan.
How I Can Help
Now you see why cash balance plans are growing so quickly. They offer great benefits for both employees and employers. In fact, a cash balance plan may be just what one of your clients needs. Don’t worry, though, if establishing a cash balance plan for your clients is a little beyond your expertise. I’m here to help.
As a pension consultant at FinancialFocus Retirement Plan Services, I partner with financial advisors just like yourself to help your business-owner clients sponsor high-quality retirement plans. If you have a client that could benefit from high contribution limits into a qualified plan or simply a plan that their employees actually like, email me today at email@example.com.
About Kenny Phan
Kenny Phan is a Managing Partner at FinancialFocus Retirement Plan Services. He works as a pension specialist who partners with financial professionals to design and implement pension plans. His area of expertise is customized defined benefit, defined contribution, and 401(k) plans. Serving financial advisors and businesses around the nation, he is supported by FinancialFocus Retirement Plan Services. Together, they provide comprehensive plan design consultation, administration, document installation, compliance testing, as well as IRS and DOL reporting for qualified retirement plans.