Cash balance plans can be a great option for plan providers with established employees who are nearing retirement. These plans are especially good for high-income executives. Providing greater flexibility to retirement planning, they allow for additional retirement savings through a cash balance pension that can be added on top of an existing 401(k)—for a plan sometimes called a “401(k) combo plan.” Unfortunately, an incident at IBM in 1999 gave these plans some bad press early on, but current federal regulations as well as other changes in retirement planning over the last couple of decades have redeemed combo plans. In 2012, Forbes published an article that referred to them as “the 401(k) on steroids.” (Source: http://www.forbes.com/sites/greatspeculations/2012/07/24/the-401k-on-steroids/)
What Is a Cash Balance Plan
If Forbes likes it, it must be great, but what exactly is a 401(k) combo plan? According to the Department of Labor (DOL), “a cash balance plan is a defined benefit pension plan that defines the benefit in terms that are more characteristic of a defined contribution plan. . . . [The plan] defines the promised benefit in terms of a stated account balance.” (Source: http://www.dol.gov/ebsa/faqs/faq_consumer_cashbalanceplans.html) In a combo plan, participants have the option to add a cash balance plan to an existing 401(k), providing a way around annual limits that might otherwise inhibit employees near retirement age from reaching their savings goals.
What Are the Benefits of Adding a Cash Balance Plan
Financial setbacks happen. If one happens near retirement, an employee could have difficulty meeting savings goals, and the result could be a delay in retirement. A cash balance plan can help individuals who have experienced heavy losses during an economic downturn. Additionally, this type of plan can be beneficial to middle-aged individuals who have not yet begun saving for retirement. Federal law allows for additional tax-deferred contributions through cash balance plans, so these plans are ideal for a number of plan participants who find themselves needing to play catch-up for any reason.
What More Do You Need to Know About Cash Balance Plans
There are federal laws that govern cash balance plans. For some employers, converting an existing plan to a cash balance plan is a lucrative move. For others, it may not be the best option. Some employers may opt to add a cash balance plan on top of an existing 401(k) plan to create a combo option. The consultants at Heartland Consulting Group enjoy helping clients find a retirement plan that fits company objectives. We’ll help you assess the needs of your employees and also evaluate the costs of various plans.
We also understand the details of converting to a new plan or adding options for qualified participants. Rather than trying to handle complex plan-management details yourself, let us do it for you. It’s what we do best. Our consultants have an average of over 20 years industry experience, and our careful attention to detail can help eliminate costly errors that often happen when inexperienced employers tackle retirement plan administration without professional help.
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