PLANSPONSOR - February/March 2021 - 30

PLAN DESIGN | DEFINED BENEFITS
tax credit of $6,760: a reduction in tax
savings, " he says. " We believe this will be
a huge shift in DC plans. Participants will
most likely move to making Roth after-tax
contributions. The amount participants
will lose from getting rid of the tax deduction,
we believe, will be made up in cash
balance plans. "
Nishat says his practice has especially
seen interest among plans with high
earners, such as physician groups.
Another advantage to cash balance
plans vs. the final-average-pay DB plan
is that managing their funding is easier.
If the plan sponsor wants to decrease or
increase its contribution, this could be
done by changing the plan's contribution
formula, Nishat says. Changing the
contributions in a traditional DB plan is
much more complex, as it is dependent
on the legislated actuarial assumptions to
determine plan liabilities. Cash balance
plans may be amended before employees
accrue 1,000 hours-typically by May of
the year-so the plan sponsor contributes
less, Nishat says.
For employers debating between a
DC or a DB plan for their business, a cash
balance plan can provide a bigger benefit.
For one thing, the contribution limit for
the DB plan is higher, Nishat says. A
60-year-old plan sponsor may contribute
about $260,000 into his own account
in the company cash balance plan annually,
he says. " In addition, with at least 10
years of cash balance plan contributions,
a participant can accumulate as much as
$2.8 to $3 million upon retirement at 62. "
In the DB plan, a single sum as high
as $2.9 million may be paid at age 62.
The limit phases in over 10 years and
reflects both contributions deposited and
investment returns. Because contributions
to the plan generally are made each
year, the shorter the horizon to retirement,
the higher the annual contribution
can be without exceeding this limit.
Conversely, a longer horizon results in a
lower annual contribution limit.
Further, with a cash balance plan,
employers have more flexibility for
controlling their costs. The sponsor may
freeze its plan, should the need arise
to suspend contributions. Plus, highly
compensated employees (HCEs) and
certain job classifications-e.g., nurse
practitioners and physician assistants-
may be excluded if the plan sponsor
thinks the contributions for them would
be too high, Nishat says. Any such exclusions
would need to be stated in the plan
document, he points out.
Meeting the rules for nondiscrimination
testing in cash balance plans can
How Defined Benefit Plans Compare
Defined
Benefit
Guaranteed minimum benefits
Lifetime income stream
Investment risk borne by plan sponsors
More valuable accruals for older participants
Stable employer contributions/expense
Designed to provide inflation protection
Source: Milliman
3
3
3
Variable
Benefit
3
3
3
3
3
3
Cash
Balance
3
3
3
3
be complex, so sponsors need to work
with a good actuary, he says, adding
that it is easier to pass testing if the cash
balance plan is paired with a 401(k).
For employers interested in starting
a cash balance plan, the Setting Every
Community Up for Retirement Enhancement
(SECURE) Act has made it easier,
Nishat observes. " Employers can now
decide whether to adopt the plan and
have until their tax filing deadline to
fund it. This is better because they know
their business' budget for the current
year. "
Plan sponsors can mitigate cost
volatility in cash balance plans by using
certain interest crediting rates. However,
Hudson says, approximately two-thirds
use an interest crediting rate tied to
the Treasury rate, which makes it more
difficult to provide a reasonable benefit
level due to the very low interest credits
provided by these plans in today's low
interest rate environment.
Plan sponsors can, though, combine
the concept of a cash balance plan with
a variable plan to annually adjust the
amount of pay credit participants receive,
Hudson says. " If plan investments don't
earn enough to cover the interest credit,
the sponsor would lower the pay credit so
the amount of funding it has to put into
the plan remains solid. "
If plan sponsors have a marketreturn
cash balance plan or, to a lesser
extent a variable benefit plan, they can
create a scenario wherein they use
investments to form a liability hedge
and see minimal volatility, Lowell says.
" Whatever the contribution and interest
credit formula is, that's your cost, along
with administrative costs, " he says.
Lowell acknowledges the difficulty
of going against the grain, as most
employers choose DC over DB plans-
particularly the nontraditional type. " It's
hard for a chief financial officer [CFO]
or human resources [HR] officer to say,
'We're going to be different.' I think
that's what stopping things right now, "
he says. -Rebecca Moore
30 PLANSPONSOR.COM February - March 2021
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PLANSPONSOR - February/March 2021

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