They’re taking off. Cash balance plan-provider Kravitz finds the number of new cash balance plans increased by 15 percent, with plan sponsor contributions up 30 percent.
There were 20,452 cash balance plans active in 2016, the most recent year for which complete IRS reporting data is available, according to the Ascensus-owned firm’s “2018 National Cash Balance Research Report.”
Also known as hybrid plans, cash balance plans combine the high contribution limits of traditional defined benefit plans with the flexibility and portability of a 401k.
Growth was expected to be slightly slower in 2016 due to election-year uncertainty and possible changes to tax rates, but these factors did not ultimately impact the market.
In fact, employer contributions to cash balance plans soared 30 percent to $38.2 billion up from $29.3 billion in 2015, for total plan assets of $1.03 trillion.
“Cash Balance plans are particularly appealing to small business owners who need to catch up on delayed retirement savings,” Dan Kravitz, head of Kravitz, said in a statement. “In many cases they can double or even triple their pre-tax retirement savings. Employers also typically increase contributions to employee accounts 50% or more when adding a Cash Balance plan, and that’s a vital competitive edge in a very tight labor market.”
Key findings from the Kravitz report include:
- Small businesses are driving Cash Balance growth: 92 percent of Cash Balance plans are in place at firms with fewer than 100 employees; 57 percent have 10 or fewer employees.
- Companies with Cash Balance plans increase their contributions to employee retirement savings 50 percent or more: The average employer contribution to staff retirement accounts is 6.9 percent of pay in companies with both Cash Balance and 401(k) plans, versus 4.7 percent of pay in firms with a 401(k) plan alone.
- California and New York have the most plans overall while the fastest growth has been in Georgia and Michigan: California and New York account for 25 percent of all new Cash Balance plans followed closely by Texas, Ohio, and Florida. Georgia is a regional powerhouse with close to 29 percent year-over-year growth in new plans.
- IRS regulations allowing broader cash balance investment options have accelerated growth in new plans: The “Actual Rate of Return” option and other new investment choices approved in the 2010 and 2014 Cash Balance regulations made these plans more flexible for employers and removed certain funding issues. The number of large plans using Actual Rate of Return is now 39 percent, up from just 10 percent five years ago.asc
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
