Increase DB Plan vs non-gov 457b vs taxable

[TheGipper]

Two physician couple (age 40 radiology, age 30 IM), currently maxing tax protected space.

His (401k/PSP, backdoor Roth, Cash Balance Defined Benefit Plan (75k age limited max), moonlighting hospital 403b to max personal 18k limit not used in PSP)

Her (403b, 457b, 457f, backdoor Roth)

In the next 10 years the amount I will be allowed to contribute to the DB plan will significantly increase up to 150k, perhaps more. The plan is managed to maintain a 60/40 AA, with 5% target benefit, mix of index and active funds (avg fund ER 0.33), additional fiduciary advisory fee of 0.2% AUM. Can change contribution amount q3 yrs. catch up payments q1-5 yrs. Plan allows rollover to IRA or other 401k upon leaving.

Her non-gvt 457b has excellent Vanguard options. Withdrawal rules upon leaving are 1) immediate lump sum 2) rollover to another 457b or 3) Set up periodic payments which can be delayed and spread over 10 yr period until age 70.

Love the tax deferral of DB plan. My plan is to delay SS/RMDs until age 70 and ultimately Roth convert much of this at an effective tax rate below 15-20% at age 60-70.

My concern is that if my DB plan starts to dwarf my other contributions, it will push my portfolio too bond heavy and with higher aggregate fees than I'd prefer.

Should I:
1). Stay the course, keep maxing out DB plan to age based limits.
2). Cap DB at 50-75k for now, invest rest in taxable account. Consider higher DB contributions later on.
3). Consider upping DB or taxable at expense of 457b. Contribute to 457b again later in career.

[TheGipper]

Edit: Spouse 38 IM. (Not 30, ha, I wish )

[TheGipper]

Hi Rex,

Not rethinking, just didn't know the amount I was eligible for in DB plan would escalate so rapidly. I can compensate with less bonds elsewhere to maintain my desired AA if the DB is less than 1/3 of my total portfolio, but after that it starts to dominate AA and fees.

The way I view these plans is that the target 5% benefit is largely irrelevant for final returns. Sure I will be paid out 5% upon leaving, but depending on performance I may have had to put in extra catch up contrubutions or skip contributions to get back to 5%. Thus my actual return may be more or less, just depends on performance net of fees. To answer your question, our plan is currently slightly underfunded of the target 5% since the squaring up several years back. Next round of catch ups 2017.

[TheGipper]

Rex, my plan is very different than yours.  We are comparing apples to oranges.  It is a hybrid cash balance plan that "ensures" a 5% annual return, eligible to be rolled over into an IRA or 401k/403b upon retirement or leaving the group. There is no lifetime cap on final balance that I am aware of nor is there a formal retirement benefit paid by the plan or group.  When you leave you take your portion of the account and run.

Although we pay an advisory 0.2% AUM to manage this pooled investment, this can be negoatiated down as balance grows.  We have ultimate say over plan AA and funds chosen.  If we as a group decided, we could make it 100% low cost index funds.  Tough to get agreement on anything among 40+ MDs so we have picked a manager with a preference for index funds and keeping fund costs low.

[TheGipper]

Rex, you are correct on the $210,000/year (+COLA) benefit payout legal maximum.  But unless I'm mistaken, this is an annual cap, not a lifetime cap on the benefit.  Lets say one does overfund their cash balance plan to a total accrued benefit of say 2-3 million by the time of retirement/leaving the group.  My plan allows for waiver of annuity payout and rollover to IRA or other qualified retirement plan of the annual max benefit (currently $210,000).  Sure it would take at least at least 10 years to fully rollover to IRA (depending on inflation adjustment of max payout and if your plan suspends the interest credit once benefits commence), but still not a bad option when you consider the 45% upfront tax deferral.  No?  I guess some might argue keeping the balance at 1 million or below would be optimal to let you fully roll over to IRA in 5 years.  A lot depends on your retirement income and tax planning circumstances.

[TheGipper]

Rex.  I appreciate the advice and do have a call in to our TPA to clarify.

From the excellent article you provided though, a line on a key difference between a cash balance plan and traditional defined benefit plan:

Further, when owner-employees separate from the business with a cash balance plan (at retirement or before), they are generally able to take the accumulated balance with them, in cash, to fund retirement or to bring to their next employer. This portability feature is not available with traditional pension plans. - See more at: http://www.journalofaccountancy.com/issues/2015/mar/cash-balance-plans.html#sthash.A7qjha8X.dpuf

This supports my original assumption that there are ways to transfer the entire balance to an IRA or 401k upon leaving the group or retiring.  Do you interpret it differently?

This appears supported by my summary plan description, but I will clarify with the administrator.  If there is truly a hard cap in the range of 2.6 million or if my annual benefit payout will be calculated as lower than the 210k inflation adjusted max, then I agree, I think it will make sense to slow down contributions.  I'll report back.