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Cash Balance Plans

Retirement Rules for Small Business Clients

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There is more attention being paid retirement plans by Congress. How to decrease the federal budget has the hill looking for short term and short sighted solutions. This includes retirement plans. Small business owners must review their current company retirement to be certain they are taking full advantage of current tax laws. Alternatives are many and require a thorough analysis of your current situation.

Consider the case of a cardiac surgeon with two partners plus seven employees that Foster handled. The doctors had a profit sharing planfor years. The surgeon and his partners each saved $49,000 per year, and put away the matching percentage for his employees based on their salaries. After a while, the doctors’ wealth accumulation slowed due to slumping markets. Foster helped them change the plan from a traditional 401(k) profit sharing plan to a strategy using “New Comparability Allocations.” One requirement for this plan is this: If owners want to be able to contribute the full $49,000 for themselves, they must contribute a minimum of 5% of salary for each employee.In addition, the surgeon and his partners added another retirement plan, called a “cash balance plan.” This works for small business owners who are over age 45, have sustained profitability and are worried about taxes and accumulating enough to retire. If done properly, the business owner does not have to pay all of the employees additional money in the cash balance plan. After paying the employees 5% on the defined contribution plan, and then adding another 2.5% minimum on the cash balance side, the business owners only have to include 50 employees, or 40% of the employees, whichever is less.

via onwallstreet.com

There are alternatives for all business owners when saving for retirement. Each individual business has it’s own goals and must be custom designed to provide optimum results. Cash balance plans are gaining traction for businesses with steady cash flow.

Please comment or call to discuss how this affects you and your organization.

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Show off your defined benefit plan, experts say

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There are excellent alternative retirement plans which will attract and retain top talent. Potential employees are beginning to look for retirement plans with a hands off approach. They would prefer to have professionals make the choices.

“Employers shouldn’t put all of their money into private equity because that was delivering huge returns at one point, but then it just collapsed,” Mohindra says. “At the same time, you don’t want to put everything into bond funds, which would basically earn very meager returns. That wouldn’t give them what they need.”According to a recent study by the Employee Benefit Research Institution, defined benefit plans have been on a steady decline since 1979 compared to its counterpart, defined contribution plans. While this decline may be true, Mohindra wouldn’t be surprised to see defined benefit plans grow in popularity because they pose less individual risk.

“I think the pendulum has probably swung too far in the direction of defined contributions, so the individual is at risk now,” Mohindra says. “With defined contribution plans, the employer has devolved to risk to the employee and only bares administrative costs, but companies can draw the top talent they need for the long term by offering them a better deal regarding their retirement arrangement.”

via benefitspro.com

There are alternatives to the traditional defined benefit plan that many employers including small employers can implement to attract talent.

Please comment or call to discuss how this might affect your organization.

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Hybrid Pension Plans on the Rebound

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The cash balance plan works very well with companies experiencing steady cash flow. This can be a differentiator when looking to attract and retain talented employees. Given the recent volatility many employees are seeking stability. The cash balance plan can provide this stability.

Hybrid plans have become more popular because they offer employees the security of an old-fashioned DB plan and the portability of a 401(k).”The trend over the past 20-plus years, particularly the last 10 years, was for sponsors to move away from traditional defined-benefit plans because of the volatility of cost and the volatility of the effect on their financial balance sheet,” Young says.

With the significant market declines over the past decade, many employers have switched primarily to 401(k)s. But now that the hybrid regulations have been clarified, employers may give pension plans a second look — in the new, improved form of the < cash-balance plan.

The portability of the hybrid plan is especially popular with a mobile, younger work force.

“Over the past decade, there has been more movement job-to-job and the idea of portability is important. An account plan allows you to move money,” says Glickstein.

“[The hybrid account] is portable,” he says. “[Younger workers] can take it with them. … It’s really appealing to employees that change jobs often. … A lot of traditional plans don’t allow you to take a lump sum

via hreonline.com

The cash balance plan works well when converting a current defined benefit plan. There are other attractive uses for the cash balance plan. Professional services firms, closely held family owned businesses among others can work very well combined with a 401(k)/profit sharing plan.

Please comment or call discuss how the cash balance plan might work in your organization.

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Need to Catch Up on Retirement Savings?

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The events of the last few years have had a profound
effect on many executives, professional and business owner’s ability to retire
on schedule.  The market volatility may
have decimated their 401k and other retirement accounts.  Along with this problem there continues to be
a threat of increased taxes to pay for the deficits.

Enter the cash balance plan where pre tax contributions
can be as much as $220,000 per year plus your 401k and profit sharing
contributions.  The cash balance
contribution limit is based on the participant’s age.  Each principal participant is able to
determine their own level of contribution.

As a hybrid plan, the cash balance plan design includes
features of defined contribution (401k) and defined benefit (pension
plan).  They are best suited for
companies enjoying stable, high incomes.
The contribution levels must be continued for at least 2 to 3
years.  There is more flexibility than
the traditional defined benefit plan and there should be an analysis performed
to determine feasibility.

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Need additional tax deductions? Attract talent.

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Given the recent market volatility, many business owners, executive and professionals are looking for ways to build up their depleted retirement plan accounts.  The cash balance plan could provide this boost.  This depends on many factors, including income levels and stability.

 

Eighty-two percent of cash balance plans are in place at firms with fewer than 100 employees, the survey found. Many Baby Boomers who own small businesses have assets tied up in the business; now that they are looking toward retirement, their advisers are recommending asset protection and a qualified plan with the highest possible contribution levels, the report states.  “Small businesses are adopting these plans because they provide nice benefits for the employees at the same time create larger tax savings and retirement savings for the business owner,” Kravitz notes.   According to the Profit Sharing Council of America, the average employee gets 2.9% of pay when their employer sponsors a 401(k) profit sharing plan, “but when a small business or employer sponsors a cash balance plan the average contribution is 6% of pay, so these plans provide a much richer benefit for the employees while at the same time creates larger contributions and tax deferred savings for the owners,” Kravitz says.

There is an attractive alternative for employers to attract and retain top talent. Many studies suggest that employees are looking for a pension plan when seeking new employment.  The cash balance plan will be a win win for both the employee and the employer.

Please comment or contact us to discuss how this could impact your company.

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Why Fees Matter for 401(k) Plan Fiduciaries, But Not Defined Benefit Pension Plans

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Defined Benefit: Plan Sponsor Bears Risks

Plan sponsors more or less guarantee a predetermined benefit to participants in traditional pension plans. This is why they’re called defined benefit (DB) plans. Whether plan sponsors spend wisely or foolishly on their plans, the sponsors are still on the hook for paying the agreed-upon pensions to their retirees.

For example, let’s say a plan sponsor invests in a global index fund with an expense ratio of 2% instead of 1%. The additional 1% in expenses has no direct impact on plan participants’ retirement income because participants’ benefits are set independently of investment returns. Also, the extra 1% in expenses comes out of the plan sponsor’s pockets, not the plan participants’. Pensions’ investment portfolio assets belong to corporations, not employees. This contrasts with the situation for defined contribution plans.

Defined Contribution: Plan Sponsors “Off the Hook” for Benefit Level

Plan sponsors make no promises about the level of benefits that participants in defined contribution plans will receive. In fact, the only thing participants know for sure is what is contributed into their defined contribution (DC) plan. The plan sponsor isn’t even required to contribute to participants’ retirement. Moreover, in contrast to the DB situation, the assets in the DC plans don’t belong to the corporation. They are held in trust for the benefit of the participants and their beneficiaries.

Here’s why plan expenses matter in 401(k) plans: The level of portfolio returns will affect the participants’ retirement income. Expenses—along with contributions and investment performance—are an important factor in long-term returns. Plan participants bear all of the risk if their portfolios don’t return enough to provide the retirement income they anticipated.

Higher expenses mean lower returns. This is why DOL sets high standards for DC plan sponsors’ expenses, yet pays little attention to expenses of their DB peers.

via smart-investor.cc

Plan sponsors maintain the responsibility to monitor plan expenses. The new fee disclosure regulations will show employees that they the employees are paying all or most of the fees associated with their plan. Questions will begin soon after the regulations take affect January 1, 2012.

Please comment or call to discuss how you will be affected.

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