PLANSPONSOR - May - June 2023 - 36

DEFINED BENEFITS
The
New
Wave
Cash balance
plans gain in
popularity for small
and midsize firms
C
ash balance retirement plans are
the fastest-growing sector of the
retirement plan market, with
more than $1 trillion in assets nationwide,
say findings from FuturePlan by
Ascensus, a third-party administrator.
According to the " 2020 National
Cash Balance Research Report, " the
firm's most recent data, the number of
new cash balance plans increased 17%
from 2017 through 2018, compared
with just 2% growth for new 401(k)
plans. There are two factors driving the
increase: 1) The plans provide a way for
small to midsize businesses to receive a
significant
tax cut for employee contributions,
and 2) they allow participants
to accelerate retirement saving on a taxadvantaged
basis beyond what they could
put into a 401(k).
FuturePlan defines cash balance
plans offered by large businesses as those
having more than 10,000 participants,
but these plans generally are conversions
from older, traditional defined benefit
plans, the report says.
In a tight labor market, the cash
balance plan's benefits could also be
a way to attract talent, as opposed to
offering equity in a business, says Jerry
Cicalese, senior vice president of strategic
partnerships at Sentinel Group in
Charlotte, North Carolina.
As these plans become more
36 PLANSPONSOR.COM May - June 2023
How Cash Balance Plans Work
Cash balance plans accrue assets in two
ways: by a pay credit, which is the employer
contribution, and a guaranteed interest
credit rate, the mandated participant earnings,
says Daniel Kravitz, national practice
leader at FuturePlan. As with conventional
DB plans, the employer bears the
risk of the investment performance.
The Department of Labor describes
cash balance plans as a type of DB plan
whose promised benefit resembles that of
a defined contribution plan-i.e., having
a stated account balance.
They are often called hybrid plans
because they have the look and feel of a DC
plan, says Kristy Wrigley-Durer, senior
counsel at law firm Crowell & Moring
Art by Georgie McAusland
popular, business
owners looking
to
implement one, or companies seeking to
convert their traditional DB plan, must
be able to explain the new plan type's
complexity and its pros and cons, say
industry experts.
in Washington, D.C. The accounts are
hypothetical, however, as payments are
calculated based on a formula, like at any
DB plan.
Also like 401(k)s, the plans are
portable, so terminating participants may
take their savings to a new employer or roll
it into an individual retirement account.
" Withdrawing yourself from a traditional
DB plan is nearly impossible, " notes Bob
Smith, president
and
co-chief investment
officer of Sage Advisory Services in
Austin, Texas. " That portability is a major
attraction for the cash balance plan. "
Cash Balance Growth Source
Big corporations with traditional DB
plans have converted them to cash
balance plans, because the latter escape
the interest-rate
risk that
led to the
constantly changing value of liabilities,
the FuturePlan report says. Additionally,
the cash balance structure allows for more
consistent
contributions
to employees,
rather than basing contributions on age.
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