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Cash Balance Plans: Recoup Your Lost Retirement Dollars
By Tim Pitney
If you’re a likely investor in a 401(k) plan or other investments, many of you saw your retirement plans erode during 2008 and in early 2009. As a result, professionals, business owners and executives are looking for creative ways to recoup recent retirement plan losses. However, plans that combine 401(k) and profit sharing features allow only a maximum contribution of $22,000 and $32,500, respectively, in 2009 for those over the age of 50. For people whose retirement is fast approaching, contributions of $54,500 a year on a pre-tax basis is often not enough to make up for vast amounts lost during the recession.
Luckily, there is a solution. Cash Balance Plans allow much higher contributions. The sponsoring company can make qualified contributions on behalf of the participant up to $195,000 per year, depending on the participant’s age and salary. Add that amount to the 401(k) and profit sharing plan contributions and, depending on age, participants can put more than $250,000 into their retirement plans on a pre-tax basis per year.
As a defined benefit plan, a Cash Balance Plan specifies the amount of contribution to be credited to each participant; either a percentage of pay or a flat dollar amount. The plan credits interest on those contributions at a set rate and for many plans is equal to the yield on the 30-year Treasury bond, which recently was about 4.7%¹ . Once participants terminate employment, they are eligible to receive the vested portion of their account balance, which is determined by the plan’s vesting schedule.
Companies that are good candidates for Cash Balance Plans exhibit one or more of the following characteristics:
1. Partners, shareholders or owners who want to contribute more than $54,500 per year.
2. Companies that have demonstrated consistent profit patterns, since a Cash Balance Plan is a defined benefit pension plan with required contributions.
3. Companies that already contribute three percent or more to employees’ accounts or are willing to do so.
Typical candidates for Cash Balance Plans include professional service businesses such as medical groups, CPA and law firms, and family or closely-held businesses where there are a number of owners who are at their 401(k) and profit sharing contribution limit.
Cash Balance Plans may not be appropriate for every business. Because they are a type of defined benefit plan, Cash Balance Plans require a commitment to a specific contribution level for at least two to three years. A company should display consistent profit before considering a plan.
For highly compensated individuals, who face a bleak financial future with reduced pension plan assets, a Cash Balance Plan is an ideal vehicle to recoup lost retirement monies. Cash Balance Plans provide an opportunity to increase contributions to a qualified retirement plan, while deferring taxable income.
Tim Pitney is Vice President of Investment Advisory at Sapers & Wallack, Inc. and can be reached at tpitney@sapers-wallack.com or (617) 225-2600.
Ken Guidroz is Director, New Plan Design at Kravitz, Inc. and can be reached at kguidroz@kravitzinc.com or (818) 379- 6165.
1. Wall Street Journal, April 26, 2010. http://online.wsj.com/mdc/public/page/2_3022-bondmkt.html