Cash balance plans may be an anomaly for the defined benefit industry in that they actually increased during the Great Recession.
According to John Guido, principal at provider research firm Retirement Research Inc., there was a minor increase in the retirement vehicle in 2007, but then pretty rapid growth from 2008 through 2011. Especially rising in growth with companies at the low end of the market, which he characterizes as those with less than 50 employees and in the couple hundred thousand to about $5 million in assets range, cash balance plans comprised 10% of the overall defined benefit universe in 2008 and have risen to 20% of all plans now.
When you get close to 10% growth, thats pretty exciting, Guido says. I cant say for sure but my suspicion is that advisers and consultants are driving some of the activity and I think youre going to see more growth.
Most retirement-specific advisers, Guido confirms, are likely familiar with the cash balance plan option, but other financial and employee benefit advisers may not be as acquainted. So what is it, exactly?
Cash balance is a DB plan with some defined contribution-like features in it, says Rich Hiller, senior vice president, government market, at TIAA-CREF. It has a stated contribution amount but also promises a certain level of benefits like a DB does. Hiller cautions that CB plans should only be used in very specific cases.
Sometimes what happens with CB plans is that theyre used as a compromise, he says. Companies think, well, we cant do DB anymore but we dont want to do a 401(k), so sometimes they become a compromise that doesnt really meet the objectives of the employer or the employee. He explains that if the guaranteed earnings rate is too low, then employees wont have adequate income for retirement. And on the other hand, if the rate is too high, then employees are more than prepared for retirement, but the employer is taking on a great deal of funding risk.
Thats why, Guido says, the first place to start for an adviser who thinks this niche product might be good for a client is to assess the companys whole situation, in terms of number of employees, growth potential if you have a slower growth with a more centralized workforce that you expect to be more tenured a cash balance would maybe be a better way of going. And, he says, the aforementioned asset margin should also be factored in to that analysis.
He adds that the adviser community should definitely be looking to this vehicle because there clearly is steady growth.
TIAA-CREFs Hiller says theres another option that advisers should be aware of in addition to CB plans what hes calling a hybrid DB/DC plan. In some ways it might look like cash balance, but its really two separate funding vehicles but the DC vehicle is not a 401(k), thats whats really important. Its a 401(a) since income is the goal with hybrid so youre talking about a much smaller range of investments designed around long-term. He explains that unlike traditional DB plans with an income of 2% of salary multiplied by years of service, the hybrid is taking 1% of income in the same manner. This is combined with a contribution rate of 5% to 6% for the DC vehicle.
Whats important to take away is that the DC part is interesting because its not wealth accumulation, its retirement readiness, Hiller says.
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