401(k) Specialist Issue 2 - 2023 - 38

401(k) PRODUCTS
The Road Less Traveled for Retirement
Planning: Cash Balance Pensions
By Todd Kading and Chad Rice
" 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.
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ISSUE 2 2023 | 401kSpecialist.com
Todd Kading
Chad Rice
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.
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.
Too often employers and advisors utilize
oversimplified investment management in
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401(k) Specialist Issue 2 - 2023

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