Planning for retirement is a top priority for most Americans, and finding the right strategies and solutions to secure a comfortable future is crucial. For both business owners and individuals, there are several different options to consider, including SIMPLE IRAs, SEP IRAs, and Traditional 401(k) plans.  However, one often overlooked (and unique) option is Cash Balance Pension Plans. Combining the benefits of a traditional pension and a 401(k), cash balance plans are qualified retirement plans that offer an attractive and powerful way to save for retirement.

elderly man holding a coffee cup sitting at a table

In this article, we will explore the ins and outs of cash balance plans and why they are becoming increasingly popular among business owners and employees alike. We will delve into the key features, advantages, and potential drawbacks of cash balance plans, as well as provide insights on how to maximize their benefits.

By understanding the power of cash balance plans, you can gain a clear perspective on how these vehicles could provide long-term support for a comfortable retirement. Whether you are an employee seeking to optimize your retirement savings or a business owner looking for both an attractive retirement benefit to offer employees as well another tax-advantaged vehicle for yourself and your business, this article will equip you with the knowledge to make informed decisions.

Cash Balance Plans vs. Traditional Retirement Plans

To fully appreciate the power of cash balance plans, it is essential to understand how they differ from traditional retirement plans. Traditional pension plans, also known as defined benefit plans, provide retirees with a fixed monthly benefit based on years of service and salary. These plans are typically funded solely by the employer, and the responsibility for investment management and retirement income falls on the employer.

On the other hand, while cash balance plans are also defined benefit plans, each participant receives a contribution from the employer annually into an “account” for the benefit of the employee, which grows at a specified interest credit rate.  Upon retirement, the employee can choose to receive the accumulated balance as a lump sum or as an annuity-like stream of income.

Therefore, the primary difference between cash balance plans and traditional pension plans lies in the way the retirement benefit is calculated and distributed. While traditional pensions provide a fixed monthly benefit, cash balance plans offer participants a specified account balance, which can be more appealing to individuals seeking more control over their retirement savings.

How Cash Balance Plans Work

Cash balance plans operate on the principle of a hypothetical individual account established for each participant. This account receives annual contributions from the employer, which are credited with a predetermined interest rate. The account balance grows over time, similar to a 401(k) plan, until the participant reaches retirement age and becomes eligible to receive the accumulated balance.

The interest rate used to credit the account balance is typically based on a predetermined formula, for example the 30-year Treasury rate or a specified fixed percentage. This ensures that the account balance grows steadily over time, providing participants with a reliable source of retirement income.

When participants reach retirement age, they have several options for accessing their cash balance plan funds. They can choose to receive the accumulated balance as a lump sum, which can be rolled over into an IRA or another retirement plan without incurring immediate tax consequences. Alternatively, participants can opt for annuity-like payments, which provide a steady stream of income throughout retirement.

Key Features & Benefits of Cash Balance Plans

Cash balance plans offer several key features that make them an attractive retirement savings option. Here are some of the main features to consider:

1. Tax Benefits: Not only can you and your employees receive the benefit of tax-deferred growth of your cash balance plan account balances, but as the owner, the contributions are tax-deductible for the business.

2. Portability: Like traditional 401(k) accounts, cash balance plans are portable, allowing participants to roll over their account balance into an IRA or another employer’s retirement plan if they change jobs. This ensures that individuals can continue building their retirement savings even if they switch employers.

3. Higher Contribution Limits: Cash balance plans allow for much higher annual contributions, generally 2-3x the amount of what you can defer into a 401(k) or other traditional retirement plan. This can be particularly advantageous for high-income earners who want to maximize their tax-advantaged retirement savings.

4. Steady Growth: The predetermined interest rate used to credit the account balance ensures that cash balance plans generally grows steadily over time. Unlike 401(k) or similar retirement plans that may be exposed to market fluctuations, the growth in cash balance plans remains stable each year.

5. Choice of Distribution Options: Participants can choose to receive their cash balance plan funds as a lump sum rollover or as annuity-like payments. This flexibility allows individuals to tailor their retirement income strategy to their specific needs and preferences.

When Might a Cash Balance Plan be a Good Fit?

While cash balance plans can generally be beneficial for small business owners, the following are several characteristics that may indicate whether or not a cash balance plan could be a good fit:

1. Your Company has 2-10 Employees

2. Your Company has a High & Predictable Revenue Stream

3. You have High Earned Income as the Owner

4. You are Already Maximizing Contributions to Your Current 401(k) Plan & Desire to Contribute Over $50,000 Annually

5. You are Already Contributing 3-4% to Employees via Match and/or Profit Sharing & Willing to Contribute More

6. You are Generally Older than Your Employees

Advantages of Cash Balance Plans for Business Owners

Cash balance plans also offer several advantages for business owners specifically. Here are some of the key advantages:

1. Tax Deductible Contributions: Employer contributions to cash balance plans are tax-deductible, allowing business owners to reduce their taxable income while providing valuable retirement benefits to their employees.

2. Higher Contribution Limits: Cash balance plans allow for higher annual contributions compared to traditional retirement plans. For example, the hypothetical maximum cash balance contribution for an owner born in 1975 could be as high as $170,000 (depending on a variety of several factors).  This can be particularly appealing for business owners who want to maximize their own retirement savings while also providing generous benefits to their employees.

3. Attract and Retain Top Talent: Offering a cash balance plan as part of a comprehensive benefits package can help attract as well as retain top talent.  Having an additional retirement savings options for prospective new employees may serve as an extra incentive to join your company.  From a retention perspective, you can set a specific vesting schedule, such as a 3-year cliff (vested 100% once employee reaches 3 years of service) or a 6-year graded vesting (vest 20% per year starting when employee achieves 2 years of service, becoming 100% vested with 6 years of service), which can serve as a powerful tool to keep strong employees at your company.

4. Business Succession Planning: Cash balance plans can also be used as a tool for business succession planning. By offering attractive retirement benefits, business owners can incentivize key employees to stay with the company and take on leadership roles in the future.

Considerations When Implementing a Cash Balance Plan

Implementing a cash balance plan requires careful consideration and planning. Here are some key factors to keep in mind:

1. Costs & Administrative Burden: Cash balance plans can be more expensive to set up and administer compared to traditional retirement plans.  Expenses may include recordkeeping, third-party administration, and investment management fees.  There are also several reporting and filing requirements to be mindful of and complete on an annual basis.

2. Legal and Regulatory Compliance: Cash balance plans are subject to specific legal and regulatory requirements. It is crucial to consult with a qualified retirement plan professional, third-party administrator, or an attorney specializing in employee benefits to ensure compliance with all applicable laws and regulations.

3. Employee Communication & Education: Implementing a cash balance plan requires clear communication and education for employees. It is important for employees to fully understand all of the relevant characteristics and nuances of the plan, including its features, benefits, and any changes to their retirement benefits.

4. Investment Management: Cash balance plan investments are not managed by the employee participants.  Instead, the employer generally hires a professional investment manager to manage and oversee the portfolio, or the employer may choose to self-manage.  Given the complexities and requirement of cash balance plans, it is most common and advisable for employers to partner with a qualified  investment advisor who has knowledge and experience with managing cash balance plan portfolios.

Is a Cash Balance Plan Right for You?

Cash balance plans can be an incredibly powerful and flexible retirement savings tool for business owners and their employees, combining the benefits of a traditional pension and a 401(k) plan. While the technicalities of cash balance plans may seem complex, understanding the basic principles is not as challenging as it may seem.  Educating yourself on the key features, advantages, and potential drawbacks of cash balance plans can help you make informed decisions about your retirement strategy.  Working closely with a financial advisor who specializes in retirement planning and cash balance plans specifically can also help you navigate the intricacies of these plans and ensure you make the best decision for you and your company.

At Tenet Wealth Partners, our team specializes in cash balance pensions, and we partner with clients to establish and manage cash balance plan investments.  Contact our team today if you have questions.  We would be happy to discuss the benefits as well as if a cash balance plan may be a right fit for you.



Registered Representative of Sanctuary Securities Inc. and Investment Advisor Representative of Sanctuary Advisors, LLC. Securities offered through Sanctuary Securities, Inc., Member FINRA, SIPC. Advisory services offered through Sanctuary Advisors, LLC., a SEC Registered Investment Advisor. Tenet Wealth Partners is a DBA of Sanctuary Securities, Inc. and Sanctuary Advisors, LLC.

The information provided in this communication was sourced by Tenet Wealth Partners through public information and public channels and is in no way proprietary to Tenet Wealth Partners, nor is the information provided Tenet Wealth Partner’s position, recommendation or investment advice.

This material is provided for informational/educational purposes only.  Any hypothetical examples provided within this material are for illustrative purposes only. This material is not intended to constitute legal, tax, investment or financial advice. Investments are subject to risk, including but not limited to market and interest rate fluctuations.