The Road Less Traveled for Retirement Planning: Cash Balance Pensions

“Two roads diverged in a wood, and I—

I took the one less traveled by,

And that has made all the difference.”

-Robert Frost

In this highly competitive employment market, structuring a compensation package that attracts and retains talent is vital to any organization’s success.

Employers offering a tax-efficient vehicle to manage employees’ current income while enhancing their long-term financial security can create massive interest from prospective employees and huge loyalty from existing ones. If the choice is a road with cash balance and a road without, most employees would choose the road with, but most employers simply do not offer that road.

What is the cash balance plan road?

Cash balance plans are an often overlooked retirement plan choice. The appeal of cash balance plans for employees is the ability to defer taxes on a substantial amount of current income while building considerable retirement dollars. A percentage of each participating employees’ income is deferred into an asset pool, reducing their current income tax burden. Assets are managed to earn an interest crediting rate, allowing for continued growth through the term of the plan.

What are the key features?

These plans offer a range of attractive benefits to highly compensated employees. Reducing current income tax by deferring significant amounts of income is an attractive trait. Allowable contribution limits which far exceed those for traditional, defined contribution plans, amounting to as much as several hundred thousand dollars per person every year.

Offering portability into an IRA or another workplace plan when terminating service gives the flexibility many participants want. These plans also accelerate retirement savings by deferring large sums of money into the investment pool. If principal protection of assets is desired, the need is definitely filled. This can help to offset risk in other parts of an individual’s retirement savings. Throw in the added benefit of the option to generate a lifetime income stream, and the case for a cash balance plan as a desirable benefit is solidified.

Will it help me attract and keep talent?

Cash balance plans can make an important difference in the recruitment and retention process. If the goal is to destroy your competition for workers by using your total compensation package, this strategy could be the weapon to do it.

Your peers are most likely not offering this type of retirement package. Use it to lock in your current employees and to discourage departures during the plan year, as employees will not want to lose a portion of their cash balance plan benefit. Your employees will also love the protection of plan assets from creditors in the event of bankruptcy or lawsuits.

As an employer, you always have the flexibility to choose an investment approach that best suits the plan’s needs, and one where the participants will enjoy the principal protection of the plan structure.

You can’t leave this road through the woods unattended

Personalized, professional management matters. Employers must pay attention to how those assets are invested and overseen. If the plan fails to meet its targeted rate of return in any given year, the financial burden to fill the funding gap falls on the employer.

A properly managed cash balance plan can dramatically enhance the financial well-being of employees while significantly improving an organization’s competitive position in the employment marketplace.

Too often employers and advisors utilize oversimplified investment management in a cash balance plan. A properly personalized asset management system can help mitigate risk by implementing key features. Implementation of insightful, customized investment strategies that address a plan’s specific risks, operating considerations, and return requirements outweighs the idea of a set it and forget it approach of a model portfolio system.

Applying a lifecycle approach to asset management, designed to generate returns within a specified range to meet the plan’s targets, typically leads to better outcomes. A strategy using direct investment in securities, holding them to maturity as a way to manage market risk also tends to increase the probability of success.

Also, personalized service relationship managers who can provide dedicated assistance to advisors and plan sponsors throughout the process should be available when employing a cash balance benefit.

Two roads diverged

Employers have two basic choices when designing benefits to attract and retain talent. They can be the same or be different. A properly managed cash balance plan can dramatically enhance the financial well-being of employees while significantly improving an organization’s competitive position in the employment marketplace.

Employees will be attracted to this type of benefit, and they will not want to leave for pastures that they do not see as greener because those pastures don’t have a cash balance plan. Take the road less traveled. It will make all the difference.

SEE ALSO:

• Why Cash Balance Plans are Sophisticated, Effective and Incredibly Frustrating