Updated 1/1/2019: In our previous post (#2 in this series) we looked at the wealth-accumulation advantages of cash balance plans. Discussing these advantages with business owners (your clients) is essential to selling a cash balance plan. But because clients “live with” these plan for years to come, it’s also important that they understand on an ongoing basis how the plan works and what his options are. So let’s look at those aspects.

Compared with a traditional defined benefit pension plan, benefits under a cash balance plan are easier to understand. A traditional defined benefit plan typically provides a retirement benefit based upon the owner’s salaries and years of service in the plan, and most of the benefits earned are in the last few years of employment.

Good News for Those Who Are ‘Saving Late’

Under current legislative limits, owners with 10 years of past service in the cash balance plan may accumulate up to approximately $2.8-million in their cash balance plan at age 62, in addition to any amounts accumulated from 401(k) and profit sharing contributions.

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A cash balance plan may provide an annual allocation that is a fixed dollar amount with a stated annual interest return on the account balance. This results in an ongoing, easily determined account balance, similar to a 401(k)/profit sharing plan.

Compared to a traditional defined benefit plan, the cash balance plan’s annual plan contributions tend to be more predictable, since the annual cash balance allocation and interest on prior balance may be pre-determined.

Because greater allocations are permitted in cash balance plans than in profit sharing plans, there is greater flexibility in providing adequate retirement income for both short- and long-term employees.

In contrast, under a profit sharing plan, adequate benefits at retirement are more difficult to provide for employees who failed to accumulate savings earlier in their working lives and commenced participation in the qualified plan later in life.

Cash balance pension plans are portable. Upon termination of employment, balances may be rolled into a qualified plan (if the receiving plan allows rollovers) or individual retirement accounts. This allows for continued, tax-deferred buildup of assets following the employee’s termination of employment or the termination of the plan.

Our final post in this series will present some of the benefits for financial advisors who choose to sell cash balance plans. Visit here again soon, or better yet, register for this site to receive automatic email notifications of new posts.