Many advisory firms talk about their array of tools and resources. Every firm that is worth talking to
has them. The difference, however, is what the advisor does with them. Do they have the insight to use
them properly? How well do they apply them to help you? ACG’s insights may help provide a sense of
our ability to help you achieve success, as you define that term.
“Most kitchens have the same spices in the spice rack. That does not mean everyone is a good cook.”
– anonymous
What is a Cash Balance Plan?
A Cash Balance plan is a unique tax-deferred (qualified) retirement plan that provides an alternative strategy to accelerate retirement savings with the added benefit of tax deductibility. Participant accounts exhibit the combined characteristics of a traditional defined benefit (DB) plan including high contribution amounts and guaranteed benefits with those of a defined contribution (DC) plan, where each participant maintains an account with the benefit of account balance portability. Cash Balance plans are sometimes described as a hybrid retirement strategy which utilize a different set of investment principles than either a DB or DC plan.
Achieving Account Growth
Each participant account grows annually in two distinct manners.
1. Annual Employer Contributions
2. Plan Interest Crediting Rate (ICR)
Advantages of Cash Balance Plans
Tax Reduction
Acceleration of Retirement Savings
Assets are Sheltered from Creditors
Stabilized Asset Growth
Talent Acquisition and Retention
Investment Strategy Objectives
Cash Balance Plan assets are pooled and invested collectively with the goal of meeting the guaranteed interest crediting rate. If the plan’s investment earnings exceed the guaranteed rate, the excess is used to reduce future employer contributions. The amount credited to participant accounts does not change regardless of the investment rate of return. In other words, the account balances will increase solely as a result of the plan’s schedule. Similarly, if the investment performance is less than the crediting rate, then future sponsor contributions will eventually increase to make up for the shortfall. Optimized absolute returns with an annual investment horizon focused on the annual crediting rate is therefore a preferred strategy to that of more volatile total return strategies.
Cash Balance Plans Can Be a Powerful Retirement Option
Cash Balance Plans accelerate retirement savings through large tax deductions and the use of a stable investment strategy. Additionally, a strategic allocation to a cash balance plan can be thought of as a substitute for other income producing assets in a participant’s overall retirement portfolio.
Plan sponsors can tailor their plan to minimize funding risks, while at the same time offering participants a meaningful mechanism to increase tax deferred retirement savings. In today’s rapidly changing and competitive business environment, offering a valued employee or candidate the added benefit of a cash balance retirement strategy could be the difference between business success and mediocrity.
Advanced Capital Group has been consulting on Defined Benefit and Defined Contribution plans for over 20 years. We can help Advisors and Plan Sponsors implement an efficient retirement strategy for the future. Contact us at www.acgbiz.com.
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