Asset Management in A Cash Balance Plan

The plan document will specify a target rate of return – usually between 3% and 6%.  This target rate must be realistic and there needs to be some assurance it will be hit every year, year after year, for the plan to succeed.  An investment in the market will typically cause the plan to crash with 3 to 5 years of inception even with the best asset manager in the country.  This type of plan does not work well with the volatility of market returns.

The goal of a CB Plan is current year tax deduction calculated to provide a fixed benefit certain at retirement.  If the financial advisor invests the money in the market and exceeds the target rate of return … that’s great, kudos to the FA … but bad for the business because they cannot put as much into the plan, and so lose the tax deduction.  If the financial advisor under performs the target rate, then in a down market, possibly with business profits down as well, you are faced with an increase in the contribution amount in order to keep the plan intact.  Either result from the FA generates an adverse result for the business owner.

I recommend that a Cash Balance Plan be funded with a mix of insurance products.  An annuity can provide a predictable return consistent with the plan document, and a whole life insurance policy so that the plan self-completes if the business owner dies prematurely.  When you get to retirement, there are ways to transfer ownership of the whole life insurance to the retiree.  Using insurance products gives a consistent tax deduction for the business each year.