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Spotting Cash Balance Plan Opportunities

How to identify employers ready to make the switch.

If you’re seeking a new niche to expand your plan consulting business, the growing market for cash balance plans (CBP) is worth considering. According to the 2016 National Cash Balance Research Report from Los Angeles-headquartered Kravitz Inc.: “…the Cash Balance plan market was up 19 percent in 2014, the most recent year for which complete DOL (Dept. of Labor) data is available. In contrast, the number of new 401(k) plans rose only 2 percent.” Another interesting feature of CBPs is that plans with fewer than 100 participants comprise about 90 percent of the market.

Who’s Adopting CBPs?

Sources cite several plan sponsor profiles as potential fits for CBPs. Dan Schwallie, associate partner with Aon Hewitt in Cleveland, says that organizations with existing traditional defined benefit plans might consider moving to a CBP to help participants better understand their retirement plan’s value. It’s easier to explain a CBP’s benefits versus a traditional DB plan that uses a complicated formula based on final average pay, years of service and Social Security integration, he says. Other organizations with multiple defined benefit plans, perhaps the result of mergers and acquisitions, also could consider consolidating those plans in a CBP, he adds.

Tom Swain, principal and consulting actuary with Bryan, Pendleton, Swats & McAllister, LLC in Brentwood, Tennessee, reports that most of the interest in CBPs he encounters comes from privately held firms. They may be very small employers or they could be large professional services employers, so the sponsor sizes and industries vary. The Kravitz study agreed with his experience. Nationally, professional firms were the major adopters, led by physicians (25 percent), dentists (12 percent), accounting, finance & insurance firms (9 percent) and legal services (8 percent).

Another common characteristic among adopters is solid financials. “Financially speaking, the organizations typically have strong cash flow [and] good profitability,” says Swain. “They may be growing rapidly or they may be showing a good history of strong and stable business operations. And the owners typically are sensing that they have a great need to accumulate more for retirement.”

Daniel Kravitz, president of Kravitz Inc., concurs that business owners’ financial motivations are key factors in adopting CBPs. And he notes that CBPs are almost always offered in tandem with other plans (85 percent of sponsors cited in the 2016 report had 401(k) plans). In most organizations, the overall contribution limits for employer-maintained retirement accounts are sufficient. There are exceptions however, says Kravitz, and those business owners are good CBP candidates. “For those businesses or business owners looking to create additional benefits for themselves and their employees, beyond what a 401(k) and profit-sharing plan allows for in terms of the limits, that’s where a cash balance plan adds value,” he notes.


Prospective adopters need to recognize several factors: Sponsors must adhere to defined benefit plan funding rules to ensure there are sufficient assets to provide promised benefits, says Schwallie. Those rules can lead to funding fluctuations. “The investment risk [in a CBP] is on the employer, not the employee,” Schwallie points out. “When markets are good, they may be able to invest in a way to lower their funding contributions to the cash balance plan because the market has done well, and it has given them more than enough to provide benefits. If the market is not doing so well, they have to make that up with extra contributions to the cash balance plan.”

Additional administrative costs associated with CBPs are another factor, but those are generally not onerous, says Kravitz. He cites a rule of thumb that the administrative and actuarial costs to run a CBP are typically double that for the organization’s 401(k) plan. At the same time though, CBP investment-related costs are often lower. “On the investment side, … it’s usually more costly to run a 401(k) plan because of the need for the daily record keeping, and all those other moving parts in a 401(k) plan that usually enhance the investment costs,” he says. “In a cash balance plan, the money is typically invested more in a trustee-directed type of arrangement where there’s less cost on that side of the ledger.”

Spotting Prospects

Kravitz suggests that plan consultants can identify CBP prospects by determining which of their plan-clients is already at or close to the maximum 401(k) contribution amount. Organizations hitting the limit are more likely to consider adding a cash balance plan. Another factor to consider is the ratio of owners and executives to employees. A ratio of one owner or executive to 10 or fewer employees works best, in his experience. For example, a small medical group with three or four shareholder-doctors and 30 to 50 employees won’t mind making additional contributions to their employees’ retirement accounts because the resulting income tax savings to the owners will more than justify the cost, says Kravitz.

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