Cash balance plans are becoming increasingly popular with small businesses as well as Fortune 500 companies, says Dan Kravitz, president and CEO of Kravitz, Inc., an independent firm of retirement consultants headquartered in Southern California.

The “2011 National Cash Balance Research Report,” released recently by Kravitz, notes a 20% average annual increase in new cash balance plans since 2001, compared with a 3% average annual growth rate for 401(k) plans.

For the past three years, Kravitz and his team have conducted the cash balance plans survey to inform small and large plan sponsors. “We found that there isn’t much information out there with regards to cash balance plans compared to all the information that’s available with 401(k) plans,” Kravitz says.

Eighty-two percent of cash balance plans are in place at firms with fewer than 100 employees, the survey found. Many Baby Boomers who own small businesses have assets tied up in the business; now that they are looking toward retirement, their advisers are recommending asset protection and a qualified plan with the highest possible contribution levels, the report states.

“Small businesses are adopting these plans because they provide nice benefits for the employees at the same time create larger tax savings and retirement savings for the business owner,” Kravitz notes. 

According to the Profit Sharing Council of America, the average employee gets 2.9% of pay when their employer sponsors a 401(k) profit sharing plan, “but when a small business or employer sponsors a cash balance plan the average contribution is 6% of pay, so these plans provide a much richer benefit for the employees while at the same time creates larger contributions and tax deferred savings for the owners,” Kravitz says.

Large companies also look at cash balance plans for a different reason, he believes.  Fortune 500 companies are converting their traditional defined benefit plans into cash balance plans because “they find that cash balance plans are easier for their participants to understand, and easier for them to manage from both the investment standpoint and liability standpoint,” he says.

Kravitz thinks a lot of participants in defined benefit plans find them difficult to understand, while cash balance plans like 401(k) and profit sharing plans are easier to understand, more flexible and portable.

 

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