The Cash Balance plan is a unique retirement tool that enables high income professionals maximize their own retirement savings while maintaining a benefit for their staffs. Actuary Chuck Munsell and pension designer Leah DeMartino will present a guide for Financial Advisors, brokers and RIAs on how cash balance plans work and provide examples of strategies to position the cash balance plan offer to win new clients and provide greater value to these high income individuals who need more aggressive options than a 401(k) or other standard retirement benefit plans.
Updated January 2015
3. ACTUARY &EMPLOYEE BENEFITS
Established in 1943, Nyhart is an ESOP
with 115 employees and offices in
Indianapolis, Chicago, Atlanta, St. Louis,
Kansas City, Houston, Denver and San
Diego.
Areas of Expertise Include:
• Cash Balance Plan
• Defined Benefit & Pension
• Defined Contribution & 401(k)
• Employee Stock Ownership Plan
• Flexible Spending, HRA & HSA
• Healthcare Actuarial Consulting
Learn more at www.nyhart.com
4. ACTUARY &EMPLOYEE BENEFITS
22 Actuaries Consulting In 48 States.
Nyhart is one of the nation’s largest
independent actuarial and employee
benefit firms, consulting to and
administering the plans for clients with
more than $14 billion in assets.
Our team of benefit advisers deliver
personalized analysis and
recommendations, translating complex
calculations and issues into common
language that enables corporations,
associations, churches and
governments to effectively manage
their retirement and health care benefits.
5. www.nyhart.com
Actuaries by location
Indianapolis
Thomas L. Totten, FSA, FCA, EA, MAAA
Tayt V. Odom, FSA, FCA, EA, MAAA
John L. Dowell, FSA, FCA, EA, MAAA
Randy Gomez, FSA, FCA, MAAA
Ryan Bedel, ASA, CPC
Carter Angell, FSA, EA
John Cierzniak, EA
Matt Sherertz, ASA, EA
Karl Willman, ASA, EA
Charles Munsell, III, EA, MSPA
Evi Laksana, ASA
Malcolm Merrill, ASA, EA
Atlanta
Randall Stanley, FSA, FCA, EA, MAAA
David Harris, ASA, EA, MAAA
Kimberly Lovingood, FSA, EA
Chicago
Mike Zurek, EA
Houston
Dan Homan, EA, MAAA
San Diego
Teena Sarkissian, EA, CPC, MAAA, MSPA
Marilyn Jones, ASA, FCA, EA, MAAA
St. Louis
Heath Merlak, FSA, FCA, EA, MAAA
Nick Meggos, EA
6. Agenda
What are cash balance plans?
How do the plans work?
What is the role of the advisor?
Real-world example.
How to start winning new business.
7. Why Defined
Benefit?
Limit is on the benefit,
not the contribution
Can fund towards
target in excess of $2.5
million dollars for
principal
9. What is a Cash
Balance Plan?
A hybrid defined
benefit plan
Looks and acts like a
401(k) plan from a
benefits perspective
More robust from a
funding perspective
11. Why a Cash
Balance Plan?
A defined benefit plan
Can be leveraged with
401(k) plan
Combined plans tested
as one
Much larger
deductions available
Easy to understand
13. How do they
work?
Takes advantage of
defined benefit nature
of plan
Takes advantage of
nondiscrimination
testing rules
Typically designed with
owner focus
14. How do we not
discriminate?
Plan must be non-
discriminatory
IRS provides
framework for testing
Take advantage of the
“miracle” of compound
interest
15. Pros & Cons
Large contributions
are allowed
Investing for a pool
Benefits are fixed and
guaranteed
Favorable
Determination letter
issued by IRS
× Contributions are
mandatory under law
× Contributions could be
volatile, based upon
asset performance and
interest rates
× Government insurance
depending upon size
and structure
16. Who is an ideal
candidate for a
cash balance plan?
17. • Doctors, dentists, lawyers, business
owners and other high income
professionals
• Entities with strong cash flow
• Entities looking for tax deductions
and willing to save for retirement
• Owners who are older rather than
younger
WHOTO
TARGET?
19. REASONS
why a client want a cash balance plan:
1.The contributions are tax deductible.
2.The contributions are tax deductible.
3.The contributions are tax deductible.
20. Any other
reasons?
This is a Qualified Plan
as defined by the IRS
Assets protected from
creditors
Rollover and deferral
of taxes available upon
distribution from plan
Provides a significant
retirement benefit
22. What is the
advisor’s role?
Handle investments
Plan sponsor
education (but no
participant education)
23. How are the
investments
different?
No participant direction of
investments
Investments are in a pool
and invested for the pool
Goal is not necessarily
maximum return
Many plans are structured
to reduce volatility
Plans tend to be
conservatively invested
25. • Dr. Martin makes $500,000/yr
• Staff of 3 employees, total payroll =
$129,927
• Maximum 401(k) limitation is $53k
for 2015
• Typical design would be a 401k
safe harbor and new comparability
design ($53k max)
CASESTUDY
26. CASESTUDY
Name Salary 401k DC
Cash
Balance Total
*Tax
Savings
Dr. Martin $500,000 $24,000 $7,950 $205,800 $237,750 $95,100
Employee1 $61,154 $0 $4,113 $1,500 $5,613 $2,245
Employee 2 $29,023 $0 $4,975 $726 $5,701 $2,280
Employee 3 $39,750 $0 $2,674 $994 $3,667 $1,467
Total Staff $129,927 $0 $11,762 $3,220 $14,981 $5,992
Grand
Total
$252,731 $101,092
Percent To Target 94%
*Assuming a 40% tax rate; taxes are deferred only.
27. – Dr. Martin receives $237,750
contribution rather than a maximum
$53,000 contribution to a 401k plan
– 94% of total contribution went to owner
– Tax savings of $101,092 more than
paid for employee cost to get there
– Design choices can skinny costs
further depending upon circumstances
CASESTUDY Interpretation
28. • Physician group with 13 partners
• Staff of 10 employees
• Maximum 401(k) limitation is $53k
for 2015
• Typical design would be a 401k
safe harbor and new comparability
design ($53k max)
CASESTUDY
29. CASESTUDY
Name 401k DC
Cash
Balance Total
*Tax
Savings
Each
Partner
$18,000 -
$24,000
$35,000 $51,000 -
$250,000
$104,000 -
$309,000
Total
Partners
$237,000 $440,500 $1,460,700 $2,138,200 $855,280
Total Staff $0 $88,480 $6,300 $94,780 $37,912
Grand Total $237,000 $528,980 $1,467,000 $2,232,980 $893,192
Percent To Target 96%
*Assuming a 40% tax rate; taxes are deferred only.
30. – 12 of 13 partners receive maximum
contribution based upon their age with
cash balance plan rather than a
maximum $53,000 contribution to a
401k plan
– 96% of total contribution went to the
physician group
– Tax savings of $893,192 more than
paid for employee cost to get there
CASESTUDY Interpretation
32. HOW TO WIN BUSINESS WITH CASH BALANCE PLANS
– Most clients are in 403(b), 401(k), etc.
– Cash balance plans are “new” to most clients
– Most clients are very interested in the tax
savings with the ability to save for retirement
– As future tax rates may rise, it is a good time
to discuss cash balance plans
The advisors we work with use
the cash balance plan as a
differentiator
33. HOW TO WIN BUSINESS WITH CASH BALANCE PLANS
The advisors we work with
often use the cash balance
plan as a way into to win the
401(k) business.
34. HOW TO WIN BUSINESS WITH CASH BALANCE PLANS
Now is the time to set up the
plan to get 2015 tax savings –
so you can call with an
urgency and specific benefit of
value.
35. HOW TO WIN BUSINESS WITH CASH BALANCE PLANS
Nyhart administers over 250 of these plans on
an annual basis.
Generally doctors, dentists and small owner
firms that are profitable.
Our largest plan in 2015 has 203 employees,
and 43 highly compensated participants…
Cash flow into plans can exceed $4,000,000 per year
36. How we work
1. You get employee
census & data from
client
2. Nyhart prepares
cash balance plan
study and analysis
report
3. Nyhart prepares complete
plan packet and guide –
cobranded with your name
and services.
4. You present the
plan study to client
to win business
5. If a “go” then Nyhart
handles all admin, while you
focus on client education and
investment decisions.
37. How we work
1. You get employee
census & data from
client
2. Nyhart prepares
cash balance plan
study and analysis
report
3. Nyhart prepares complete
plan packet and guide –
cobranded with your name
and services.
4. You present the
plan study to client
to win business
5. If a “go” then Nyhart
handles all admin, while you
focus on client education and
investment decisions.
38. In Conclusion
• Cash balance plans provide large
tax benefits to owners.
• Cash balance plans provide large
retirement accounts.
• Qualified plan with the IRS
• Cash balance plans offer the
opportunity to sell 401k plans.
Areas of Expertise Include:
Cash Balance Plan
Defined Benefit & Pension
Defined Contribution & 401(k)
Employee Stock Ownership Plan (ESOP)
Flexible Spending, HRA & HSA
Healthcare Actuarial Consulting
Learn more at www.nyhart.com
Areas of Expertise Include:
Cash Balance Plan
Defined Benefit & Pension
Defined Contribution & 401(k)
Employee Stock Ownership Plan (ESOP)
Flexible Spending, HRA & HSA
Healthcare Actuarial Consulting
Learn more at www.nyhart.com
Areas of Expertise Include:
Cash Balance Plan
Defined Benefit & Pension
Defined Contribution & 401(k)
Employee Stock Ownership Plan (ESOP)
Flexible Spending, HRA & HSA
Healthcare Actuarial Consulting
Learn more at www.nyhart.com
What is a cash balance plan?
Why would a client want a cash balance plan?
Who are the right targets?
Role of the advisor
Real example
Winning business with a cash balance plan
Conclusion
Obviously, advisors handle the investments
Advisors may also consult on the fiduciary aspects of the plan
Typical ERISA fiduciary rules apply
Plan must be prudently invested
Investing for cash balance plans are different than 401k plans
Differences
No participant direction of investments
Investments are in a pool and invested for the pool
No education of participants for investments (plan sponsor, however, still must be educated)
Goal is not necessarily maximum return
Many plans are structured to reduce volatility
Plans tend to be conservatively invested
A cash balance plan is a qualified retirement plan
Contributions are tax deductible
Earnings are tax deferred
Lump sums can be rolled into an IRA
A cash balance plan is a defined benefit plan with all its warts
Cash balance plan looks like a 401k plan
Fictitious accounts are generated for each person
The employer “makes” a contribution for the employee
For example, 5% of employees pay
The account grows with a stipulated interest rate
For example, 1 year T-Bill interest rate
Benefit design is governed by plan document
Generally a companion to a 401k plan
Obviously, advisors handle the investments
Advisors may also consult on the fiduciary aspects of the plan
Typical ERISA fiduciary rules apply
Plan must be prudently invested
Investing for cash balance plans are different than 401k plans
Differences
No participant direction of investments
Investments are in a pool and invested for the pool
No education of participants for investments (plan sponsor, however, still must be educated)
Goal is not necessarily maximum return
Many plans are structured to reduce volatility
Plans tend to be conservatively invested
A cash balance plan is a qualified retirement plan
Contributions are tax deductible
Earnings are tax deferred
Lump sums can be rolled into an IRA
A cash balance plan is a defined benefit plan with all its warts
Cash balance plan looks like a 401k plan
Fictitious accounts are generated for each person
The employer “makes” a contribution for the employee
For example, 5% of employees pay
The account grows with a stipulated interest rate
For example, 1 year T-Bill interest rate
Benefit design is governed by plan document
Generally a companion to a 401k plan
Obviously, advisors handle the investments
Advisors may also consult on the fiduciary aspects of the plan
Typical ERISA fiduciary rules apply
Plan must be prudently invested
Investing for cash balance plans are different than 401k plans
Differences
No participant direction of investments
Investments are in a pool and invested for the pool
No education of participants for investments (plan sponsor, however, still must be educated)
Goal is not necessarily maximum return
Many plans are structured to reduce volatility
Plans tend to be conservatively invested
A cash balance plan is a qualified retirement plan
Contributions are tax deductible
Earnings are tax deferred
Lump sums can be rolled into an IRA
A cash balance plan is a defined benefit plan with all its warts
Cash balance plan looks like a 401k plan
Fictitious accounts are generated for each person
The employer “makes” a contribution for the employee
For example, 5% of employees pay
The account grows with a stipulated interest rate
For example, 1 year T-Bill interest rate
Benefit design is governed by plan document
Generally a companion to a 401k plan
Obviously, advisors handle the investments
Advisors may also consult on the fiduciary aspects of the plan
Typical ERISA fiduciary rules apply
Plan must be prudently invested
Investing for cash balance plans are different than 401k plans
Differences
No participant direction of investments
Investments are in a pool and invested for the pool
No education of participants for investments (plan sponsor, however, still must be educated)
Goal is not necessarily maximum return
Many plans are structured to reduce volatility
Plans tend to be conservatively invested
Obviously, advisors handle the investments
Advisors may also consult on the fiduciary aspects of the plan
Typical ERISA fiduciary rules apply
Plan must be prudently invested
Investing for cash balance plans are different than 401k plans
Differences
No participant direction of investments
Investments are in a pool and invested for the pool
No education of participants for investments (plan sponsor, however, still must be educated)
Goal is not necessarily maximum return
Many plans are structured to reduce volatility
Plans tend to be conservatively invested
Entities with strong cash flow
Pension contributions are required by law
Actuary makes the annual contribution calculation
Entities looking for tax deductions and willing to save for retirement
Owners who are older rather than younger
A cash balance plan is a qualified retirement plan
Contributions are tax deductible
Earnings are tax deferred
Lump sums can be rolled into an IRA
A cash balance plan is a defined benefit plan with all its warts
Cash balance plan looks like a 401k plan
Fictitious accounts are generated for each person
The employer “makes” a contribution for the employee
For example, 5% of employees pay
The account grows with a stipulated interest rate
For example, 1 year T-Bill interest rate
Benefit design is governed by plan document
Generally a companion to a 401k plan
In addition, the benefits are tilted, in a dollar fashion, to the owner.
Obviously, advisors handle the investments
Advisors may also consult on the fiduciary aspects of the plan
Typical ERISA fiduciary rules apply
Plan must be prudently invested
Investing for cash balance plans are different than 401k plans
Differences
No participant direction of investments
Investments are in a pool and invested for the pool
No education of participants for investments (plan sponsor, however, still must be educated)
Goal is not necessarily maximum return
Many plans are structured to reduce volatility
Plans tend to be conservatively invested
Obviously, advisors handle the investments
Advisors may also consult on the fiduciary aspects of the plan
Typical ERISA fiduciary rules apply
Plan must be prudently invested
Investing for cash balance plans are different than 401k plans
Differences
No participant direction of investments
Investments are in a pool and invested for the pool
No education of participants for investments (plan sponsor, however, still must be educated)
Goal is not necessarily maximum return
Many plans are structured to reduce volatility
Plans tend to be conservatively invested
Obviously, advisors handle the investments
Advisors may also consult on the fiduciary aspects of the plan
Typical ERISA fiduciary rules apply
Plan must be prudently invested
Investing for cash balance plans are different than 401k plans
Differences
No participant direction of investments
Investments are in a pool and invested for the pool
No education of participants for investments (plan sponsor, however, still must be educated)
Goal is not necessarily maximum return
Many plans are structured to reduce volatility
Plans tend to be conservatively invested
The advisors we work with use the cash balance plan as a differentiator
In order for the cash balance plan to pass nondiscrimination rules, the plans must be aggregated for testing
Plan sponsor does not want to work with multiple firms
Nyhart is the back-end solution and administrator for the plan.
Firms, such as Nyhart, provide free plan census studies to show illustrations on how cash balance plans can benefit the owners. These reports generate significant impact during the client discussion and because you can offer this analysis for free (Nyhart does not charge you or the client for this analysis), you have a significant door opener.
What is a cash balance plan?
Why would a client want a cash balance plan?
Who are the right targets?
Role of the advisor
Real example
Winning business with a cash balance plan
Conclusion