Cash Balance Plans

[repititionition]

Can those with access to this vehicle talk about your approach to investing in cash balance plans? I’m starting a job with a plan and thinking about how to integrate it into my overall investment strategy.

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[nimbus]

Not much strategy involved.

Asset allocation in the CBP is set for us by plan administrator.

75% total bond index
25% total stock index


All my bonds are held in the CBP so I don’t have any in my 401k.

 

[narcotics999]

Not much strategy involved.

Asset allocation in the CBP is set for us by plan administrator.

75% total bond index
25% total stock index


All my bonds are held in the CBP so I don’t have any in my 401k.

One size fits all or age-adjusted?

 

[ambiturner]

One size fits all or age-adjusted?

Everyone in the fund shares the same allocation and contribution limits have to be signed off on by an actuary.

A cash balance plan is a DEFINED BENEFIT return, like a pension, so you are guaranteed a rate of return (typically 3-5%) no matter how the underlying assets are performing. The corporation, which means the partners in a private group, are on the hook if the fund performance comes up short. On the flip side, you may get more than you were guaranteed if the fund is closed and the assets exceed what the investors are owed.

I’ve invested in a CBP and I like it but the returns have been much lower than stocks over the past 10 years. The tax savings are great but who knows how laws and tax rates will change for retirees in 30 years.

 

[thinkorswim]

One size fits all or age-adjusted?

It’s one size fits all. These plans are designed to target a conservative rate of return, usually in the 4-6% range. The main benefit is the upfront tax sheltering.

There can also be a lot of variability in the structure. Some plans will have you designate your contribution and it will be locked in for a few years. Other plans will periodically close down and distribute funds to your 401k/IRA. Your accountants will be able to provide more details.

 

[repititionition]

thank you all. I guess I’m really asking for broader approach to investments/asset allocation in light of access to a CBP.

I will be in a high-tax state and when faced with the option of investing the marginal dollar in alternative assets (rental property, etc.) vs the guaranteed rate of return of ~50% (tax deferral) by putting that pre-tax dollar in the CBP, seems like those with access to these accounts should be maxing them out as they’re able, even to the exclusion of other asset classes. Am I missing something (other than the fact that the 50% savings is overstated because taxes WILL be paid on the back end)?

 

[nimbus]

thank you all. I guess I’m really asking for broader approach to investments/asset allocation in light of access to a CBP.

I will be in a high-tax state and when faced with the option of investing the marginal dollar in alternative assets (rental property, etc.) vs the guaranteed rate of return of ~50% (tax deferral) by putting that pre-tax dollar in the CBP, seems like those with access to these accounts should be maxing them out as they’re able, even to the exclusion of other asset classes. Am I missing something (other than the fact that the 50% savings is overstated because taxes WILL be paid on the back end)?

The limits are so high, I’ve never been close to maxing out the CBP. Although I have a single, never married , older partner who claims he puts almost his entire pretax earnings in it.

 

[OneFellSwoop]

When set up properly, a cash balance simply can’t be beat with the tax savings, the return, the low risk, and the ability to eventually move it into your 401k. PM me if you’d like details of mine. I consider it the bond portion of my portfolio. i think you can do both, real estate and cash balance. Might take you a little longer to buy a property, but for all the reasons above, I’d still start with the cash balance, again, IF set up properly, you won’t be disappointed.

 

[GravelRider]

thank you all. I guess I’m really asking for broader approach to investments/asset allocation in light of access to a CBP.

I will be in a high-tax state and when faced with the option of investing the marginal dollar in alternative assets (rental property, etc.) vs the guaranteed rate of return of ~50% (tax deferral) by putting that pre-tax dollar in the CBP, seems like those with access to these accounts should be maxing them out as they’re able, even to the exclusion of other asset classes. Am I missing something (other than the fact that the 50% savings is overstated because taxes WILL be paid on the back end)?

I have a cash balance plan and am in a high tax state. For now, it is a relatively small portion of my asset allocation, but I have been creeping up my contributions annually. The maximum that you can contribute is based on your age. Some plans require you to lock in your contribution annually, so you can only change it once a year. I am still young and have many years working ahead of me. It didn’t make sense to me to tie up a large portion of my cash flow and asset allocation into money that I cannot access until retirement age. There’s some level of opportunity cost that is difficult to calculate on an individual basis. What if you commit 50% of your earnings into the CBP, but have an unexpected expense or investment opportunity 3 months later? I would think you would need to offset the CBP with a larger emergency fund since you would be losing cash flow. Right now I think of my CBP as my “bond” portfolio because I am 100% stocks everywhere else. As you get closer to retirement age, it makes sense to put a much larger proportion of your income into the CBP.

I’m not an expert, but that’s how I think about it.

 

[pgg]

Is there any way for a W2 employee to set up a cash benefit plan or defined benefit plan? What I've read seems to imply that self-employed or 1099 workers can do it. Schwab will set up an individual defined benefit plan for $2250 and then charge $1750/year to run it but it appears that's not an option for W2 employees.

 

[thinkorswim]

Is there any way for a W2 employee to set up a cash benefit plan or defined benefit plan? What I've read seems to imply that self-employed or 1099 workers can do it. Schwab will set up an individual defined benefit plan for $2250 and then charge $1750/year to run it but it appears that's not an option for W2 employees.

As far as I know, you cannot set one up by yourself as a W2 employee. Your group/company would need to set one up, and then the big hurdle becomes plan participation. This is why some plans lock in your contributions for the year or a few years. Cash balance plans have all sorts of federal regulations regarding discrimination testing and plan participation. If you don’t have enough people willing to put money in, or your company doesn’t want to make a contribution on behalf of most employees, then you can’t set one up. This is probably why it’s much easier to set up as a 1099.

 

[pgg]

As far as I know, you cannot set one up by yourself as a W2 employee. Your group/company would need to set one up, and then the big hurdle becomes plan participation. This is why some plans lock in your contributions for the year or a few years. Cash balance plans have all sorts of federal regulations regarding discrimination testing and plan participation. If you don’t have enough people willing to put money in, or your company doesn’t want to make a contribution on behalf of most employees, then you can’t set one up. This is probably why it’s much easier to set up as a 1099.

Yeah, sounds like I'm outta luck.

 

[Mman]

I contribute maximally to cash balance pension plan at work and have done so for quite some time. I consider it to be bond equivalent in terms of returns and account for that as a bond in my overall portfolio allocation. It's a large sum of money each year and it'd be nice to have more equity exposure with it, but I have no other tax advantaged way to invest (already filling up backdoor Roth IRA, 401K, 529, and HSA) so I will take the deferred tax advantage where I can get it.

 

[nimbus]

Good place to start for those interested.

Cash Balance 101 » Cash Balance Design

A Cash Balance plan is a type of retirement plan that belongs to the same general class of plans known as "Qualified Plans." A 401(k) is a qualified plan.

www.cashbalancedesign.com

 

[narcotics999]

I contribute maximally to cash balance pension plan at work and have done so for quite some time. I consider it to be bond equivalent in terms of returns and account for that as a bond in my overall portfolio allocation. It's a large sum of money each year and it'd be nice to have more equity exposure with it, but I have no other tax advantaged way to invest (already filling up backdoor Roth IRA, 401K, 529, and HSA) so I will take the deferred tax advantage where I can get it.

Can you roll CBP into IRA, 401K after a few years?

 

[Arch Guillotti]

Can you roll CBP into IRA, 401K after a few years?

401K, not sure about IRA. If you can it would probably ruin backdoor Roth.

Can't do it too often or it draws IRS scrutiny.

 

[Mman]

Can you roll CBP into IRA, 401K after a few years?

yes you can roll over into an IRA although I am not sure when and how often. I have only been able to do it when we closed down one plan and started a new one. I think at a certain age, though, it becomes easier to do it whenever you want although I do not know the details.

 

[thinkorswim]

Can you roll CBP into IRA, 401K after a few years?

You can roll it into either, but can only do so if you are no longer employed by the group or if the plan is shut down (not every group does this regularly).

401K, not sure about IRA. If you can it would probably ruin backdoor Roth

Can't do it too often or it draws IRS scrutiny.

Agreed, rolling into a 401k is better than a traditional IRA. But to your second point, the IRS could care less about it. It won’t raise any red flags.