Cash Balance Plan

[caprivenky]

This is a sheet with data on cash balance plan given by someone . this may  help some members

2015 Contribution Limits

401(k) and Cash Balance Plans Age	401(k)/ Profit Sharing	Cash Balance	Total	Taxes Deferred (40% Tax Rate)	Taxes Deferred (45% Tax Rate)
30	$ 53,000	$ 50,000	$ 103,000	$ 41,200	$ 46,350
31	$ 53,000	$ 55,000	$ 108,000	$ 43,200	$ 48,600
32	$ 53,000	$ 55,000	$ 108,000	$ 43,200	$ 48,600
33	$ 53,000	$ 60,000	$ 113,000	$ 45,200	$ 50,850
34	$ 53,000	$ 60,000	$ 113,000	$ 45,200	$ 50,850
35	$ 53,000	$ 65,000	$ 118,000	$ 47,200	$ 53,100
36	$ 53,000	$ 70,000	$ 123,000	$ 49,200	$ 55,350
37	$ 53,000	$ 75,000	$ 128,000	$ 51,200	$ 57,600
38	$ 53,000	$ 75,000	$ 128,000	$ 51,200	$ 57,600
39	$ 53,000	$ 80,000	$ 133,000	$ 53,200	$ 59,850
40	$ 53,000	$ 85,000	$ 138,000	$ 55,200	$ 62,100
41	$ 53,000	$ 90,000	$ 143,000	$ 57,200	$ 64,350
42	$ 53,000	$ 95,000	$ 148,000	$ 59,200	$ 66,600
43	$ 53,000	$ 100,000	$ 153,000	$ 61,200	$ 68,850
44	$ 53,000	$ 105,000	$ 158,000	$ 63,200	$ 71,100
45	$ 53,000	$ 110,000	$ 163,000	$ 65,200	$ 73,350
46	$ 53,000	$ 115,000	$ 168,000	$ 67,200	$ 75,600
47	$ 53,000	$ 120,000	$ 173,000	$ 69,200	$ 77,850
48	$ 53,000	$ 130,000	$ 183,000	$ 73,200	$ 82,350
49	$ 53,000	$ 135,000	$ 188,000	$ 75,200	$ 84,600
50	$ 59,000	$ 140,000	$ 199,000	$ 79,600	$ 89,550
51	$ 59,000	$ 150,000	$ 209,000	$ 83,600	$ 94,050
52	$ 59,000	$ 155,000	$ 214,000	$ 85,600	$ 96,300
53	$ 59,000	$ 165,000	$ 224,000	$ 89,600	$ 100,800
54	$ 59,000	$ 175,000	$ 234,000	$ 93,600	$ 105,300
55	$ 59,000	$ 180,000	$ 239,000	$ 95,600	$ 107,550
56	$ 59,000	$ 190,000	$ 249,000	$ 99,600	$ 112,050
57	$ 59,000	$ 200,000	$ 259,000	$ 103,600	$ 116,550
58	$ 59,000	$ 210,000	$ 269,000	$ 107,600	$ 121,050
59	$ 59,000	$ 220,000	$ 279,000	$ 111,600	$ 125,550
60	$ 59,000	$ 235,000	$ 294,000	$ 117,600	$ 132,300
61	$ 59,000	$ 245,000	$ 304,000	$ 121,600	$ 136,800
62	$ 59,000	$ 260,000	$ 319,000	$ 127,600	$ 143,550
63	$ 59,000	$ 255,000	$ 314,000	$ 125,600	$ 141,300
64	$ 59,000	$ 245,000	$ 304,000	$ 121,600	$ 136,800
65	$ 59,000	$ 240,000	$ 299,000	$ 119,600	$ 134,550
66	$ 59,000	$ 255,000	$ 314,000	$ 125,600	$ 141,300
67	$ 59,000	$ 265,000	$ 324,000	$ 129,600	$ 145,800
68	$ 59,000	$ 280,000	$ 339,000	$ 135,600	$ 152,550
69	$ 59,000	$ 295,000	$ 354,000	$ 141,600	$ 159,300
70	$ 59,000	$ 310,000	$ 369,000	$ 147,600	$ 166,050

[litovskyassetmanagement]

Not only that but you can have a custom-designed plan that has a contribution that is front-loaded as well.  In that case you can contribute even more than these numbers, but the plan will not be around for long because of a lifetime maximum contribution amount will be reached sooner.  So for example someone who is younger can potentially contribute even more (if they have no employees other than the spouse).

[Asiandad]

Hello,

I have been a long time reader and follower of WCI.  This is my first post so forgive my dumb questions.  We have recently converted our 401K to a combined cash balanced plan this year.  We have a TPA and have moved our funds to Vanguard.  My wife and I are the administrators.  I'm understanding we want the funds in a fairly conservative investment vehicle that ranges from 3-5%. Could anyone chime in on what they would recommend using Vanguard?   The assests are $1.5M.  Thank you!

Asiandad

 

[litovskyassetmanagement]

Asiandad wrote:

Hello,

I have been a long time reader and follower of WCI.  This is my first post so forgive my dumb questions.  We have recently converted our 401K to a combined cash balanced plan this year.  We have a TPA and have moved our funds to Vanguard.  My wife and I are the administrators.  I’m understanding we want the funds in a fairly conservative investment vehicle that ranges from 3-5%. Could anyone chime in on what they would recommend using Vanguard?   The assests are $1.5M.  Thank you!

Asiandad

 

Click to expand...

I'm assuming there are just two of you, and no other participants. If you don't have a good understanding of investment management, you will want to hire a flat-fee adviser/fiduciary who will manage your plan assets for you. The CB has to have a low volatility portfolio, and the crediting rate does not matter very much  - your rate of return does not have to match the crediting rate, as long as it is close enough, especially if you do NOT have any employees (as long as you are not taking excessive risk with your investment, especially if you are close to retirement). If you have any employees other than yourself at all, you would need to hire an ERISA 3(38) fiduciary to manage the assets in both plans.  Because you will have a conservative allocation in the CB plan, you might want to adjust the 401k plan to have a more aggressive allocation.

For plans without any employees I do indeed use Vanguard.  I typically set up a single asset allocation for both accounts, so for example, if the asset allocation is 50:50, I include both 401k and CB and rebalance the CB plan, and then rebalance the 401k plan to fit a specific allocation.  Sometimes, CB contributions are large, so this is not possible, and you will end up moving up on the bond side, which might be fine especially if you are about 10 years to retirement or so, because you will definitely want to increase your bond allocation but without having to time the market and sell the stocks.  This way you can increase your bond allocation on the CB side, and not worry about the stocks going down.

The distribution phase can also be tricky - with a combo plan you will want to roll your CB into the 401k eventually (and try to keep the solo 401k vs. just an IRA, for better asset protection).  Also, you might want to do in-plan Roth conversions especially if you retire earlier than 70 and are in a lower tax bracket, as this can potentially save you significant amount in RMD taxes.  So there are many things to consider.

[litovskyassetmanagement]

Rex wrote:

It doesn’t have to have a low volatility

I have mine almost all in stocks. I very likely will do better than people with a low volatility approach meaning I’ll pay less for the same defined benefit. Since I’m the only participant, I’m okay with the risk that there is a several year drop that requires increased contributions.

You don’t seem to have a great grasp on this so you might not be able to handle a high stock portfolio.

Click to expand...

I prefer to make things simpler by having a portfolio of mostly bonds (and possibly some stocks) in a CB plan, and having more stocks in a 401k plan.  This goes well together with the strategy that increases bond allocation over time without having to sell stocks, so I'm killing two birds with one stone. This strategy works just fine by pretty much acting as a target date fund of sorts where stock allocation is decreasing over time without having to sell anything.

 

[litovskyassetmanagement]

Rex wrote:

For my age that would be too high a bond %.

Also I like the ability to makeup if my stock scenario doesn’t work out as desired. With 401k you aren’t given hat option which is also though a requirement.

Click to expand...

I never understood why age has anything to do with stock allocation.  There is no math behind that.  It is just a rule of thumb that makes zero sense however one looks at it. It is based on a mistaken assertion (which is totally false btw - a fallacy that even John Bogle repeated in his book) that risk decreases with time.

http://www.norstad.org/finance/risk-and-time.html

Annualized return volatility does indeed decrease, but that's only because we are averaging out over longer periods of time (and thus hiding the inherent risk), but actual risk increases with time (which is just basic mathematical result when looking at random processes, whether Gaussian or fat-tailed), so we need a risk managed allocation that sets the floor with bonds and becomes less risky from there as more assets are accumulated, or a customized target date allocation of sorts.  I'm a proponent of a risk-based allocation rather than age based.  One such example is an 'all weather' portfolio from Ray Dalio. And to make it easier, I prefer to fix allocations in most accounts and de-risk using other accounts (such as after-tax) depending on how these accounts would be used (for example, after-tax would be used to pay Roth conversion taxes, so we can buy bonds after-tax and have a fixed allocation in a 401k/CB, etc).

By the way, just because one has 50% in bonds does not mean that this is a conservative allocation.  I build barbell-type portfolios where the stock allocation is equal weighted with small cap, value and international exposure, so its 'beta' is significantly higher than S&P, so on the upside it might act as a 70:30 (vs. S&P and bonds) for example.  There is no mystery here, you take more risk on the stock side, and fix the floor with bonds, and this provides for a better risk management strategy than selling stocks over time.

 

[Asiandad]

Those are all great insights! And yes, I don't have a great grasp on this, yet.  Here is some brief background.  I am in my mid forties, married 26 years w/ 3 children (14,10,8).  We are debt free with no mortgages, three residential homes and one commercial, $5M in assests ($3M liquid).  Would like to work 10-20 more years b/c I very much enjoy it and the income.  Dumped all financial advisors b/c we were tired of all the promises and feeling like a piece of meat.  Decided 3 yrs ago to learn as much as I can about the financial world and take responsibility for our own financial destinies.  Found out about CBP's and converted our 401K into a blend with it.  Have 3 employees, with only one participatingshe's 70 and has about $80K her 401K/profit).  We converted to Vanguard fall of 2016 and is broken down into: vtsax 60%, vtiax 20%, vbtlx 10%, vgslx 10%.  I am posting these questions b/c I know there is a wealth of knowledge floating around and I am hoping there is someone who has been in the same seat 10 or 20 years ago and can give real personal experience with a similar situation, and how it has panned out for them.  All input is welcome, but it sure helps when someone has been there with proven results 

I still think I'm young enough to handle volatility, esp if I plan on working.

Asiandad

[litovskyassetmanagement]

Asiandad wrote:

Those are all great insights! And yes, I don’t have a great grasp on this, yet.  Here is some brief background.  I am in my mid forties, married 26 years w/ 3 children (14,10,8).  We are debt free with no mortgages, three residential homes and one commercial, $5M in assests ($3M liquid).  Would like to work 10-20 more years b/c I very much enjoy it and the income.  Dumped all financial advisors b/c we were tired of all the promises and feeling like a piece of meat.  Decided 3 yrs ago to learn as much as I can about the financial world and take responsibility for our own financial destinies.  Found out about CBP’s and converted our 401K into a blend with it.  Have 3 employees, with only one participatingshe’s 70 and has about $80K her 401K/profit).  We converted to Vanguard fall of 2016 and is broken down into: vtsax 60%, vtiax 20%, vbtlx 10%, vgslx 10%.  I am posting these questions b/c I know there is a wealth of knowledge floating around and I am hoping there is someone who has been in the same seat 10 or 20 years ago and can give real personal experience with a similar situation, and how it has panned out for them.  All input is welcome, but it sure helps when someone has been there with proven results

I still think I’m young enough to handle volatility, esp if I plan on working.

Asiandad

Click to expand...

You have employees.  This changes everything.  What you do with your personal money is important, but you also have a fiduciary obligation to take care of your staff.  Also, chances are, to pass testing you have to include younger employees into the CB plan, and most likely you are giving them non-elective 3% contribution to pass testing.  I'd be more than curious to take a look at your plan design because with an older employee, CB employer contribution can be huge.

So you can't just manage your CB plan to benefit yourself. Your CB plan has to be managed for the benefit of all plan participants, and that's what ERISA 3(38) fiduciaries do:

http://litovskymanagement.com/2014/01/hiring-fiduciary-adviser/

Rules are different when you have staff than when you have your own personal money.  I work with several practice owners in exactly the same situation.  Depending on whether you are doing a pooled 401k plan or a participant-directed 401k plan, there are a number of things that should be done for your plan:

1) 401k Investment Policy Statement.  This spells out how investments are selected and managed.  In a plan governed by ERISA this should always be done.  IPS should be followed as well, otherwise it is not very useful.

2) 401k Plan Portfolio and investments. For a pooled plan you'll have a single portfolio, and for a participant-directed plan you will also need to have a menu of funds and several model portfolios, as well as QDIA portfolio for the staff who is not nearly as sophisticated. This is at the very minimum.  You'll also need to educate the staff about their options if there is a participant-directed plan (that's part of your fiduciary responsibility).

3) For the CB plan you will also need an IPS that spells out how it would be managed.  You can't just randomly manage assets as you feel like, since this is not all of your money.  A suitable portfolio can be designed for the CB, also considering that your CB plan will not be around longer than probably 10-15 years anyway.  In this case you really don't want to deviate significantly from the crediting rate.

4) Your plan design should be optimal as well.  In some cases you don't have much control over your demographics, but there is still some flexibility as far as minimizing employer contribution.

In your case, an appropriate CB portfolio can be used for everyone, and you can use your own allocation in the 401k plan (if you have a participant-directed plan).

In short, what can be done in a plan with just yourself and your spouse should never be done in a plan that has also your staff in it.  The rules are significantly different, and as the plan sponsor you have fiduciary obligations:

https://www.dol.gov/sites/default/files/ebsa/about-ebsa/our-activities/resource-center/publications/meetingyourfiduciaryresponsibilities.pdf

 

 

[TheGipper]

Our cash balance plan is maintained at a 60/40 AA, as a compromise between younger docs and older docs who'd prefer anything from 100% equity to all short term Treasuries. We chose a 5% target interest credit, which hopefully will be achievable long term with this allocation.

We fully realize that this plan is more aggressive and volatile than most CBPs and any required catch up payments will be painful in the next prolonged downturn, but so be it.

[Slav4ikMD]

I have a super naive question as I am just finding out about cash balance plans.  My question is:  do I need one given my situation?  My situation:  late 30's, employed and maxing out employer's 457 plan and self-employed solo proprietor in private practice, contributing to a solo 401k plan.  Self-employed income is around 150k for now, but will likely gradually grow by a bit.  Can I also (or instead of the 401k?) establish a cash balance plan?  Should I only be thinking about it once I max out the 401k plan at 53k? (not quite there yet)  Thanks!

[Slav4ikMD]

I can "afford" to max out the solo 401k, just didn't make enough profit to do so. But let's assume I am maxing out the 401k, which I likely will in 1-2 years, and have extra money to put away - does it make sense then?  In a nutshell, what are the downsides, how much can it cost, does it make sense to put away more pre-tax income (if I continue to put away 54k + 18k for 457 plan) etc.

Really I am just asking whether this is something that I should be learning about now, later or never.   Not expecting a full tutorial here.

[litovskyassetmanagement]

Slav4ikMD wrote:

I have a super naive question as I am just finding out about cash balance plans.  My question is:  do I need one given my situation?  My situation:  late 30’s, employed and maxing out employer’s 457 plan and self-employed solo proprietor in private practice, contributing to a solo 401k plan.  Self-employed income is around 150k for now, but will likely gradually grow by a bit.  Can I also (or instead of the 401k?) establish a cash balance plan?  Should I only be thinking about it once I max out the 401k plan at 53k? (not quite there yet)  Thanks!

Click to expand...

Definitely not.  You are limited to 6% profit sharing in a combo plan.  If you are in your late 30s, with a $150k net 1099 your CB contribution plus the 401k would probably be close to your full $54k 401k contribution (or in the ballpark).  A CB plan is only for those who know they'll have 1099 income for at least 4-5 years (and ideally, until they retire and/or max out their CB plan because it can cost several k to close off a CB plan).  Also, I wouldn't recommend a CB plan for someone in their 30s unless they can max it out (precisely because of the above math), and that would require a W2 of $270k AND employer contribution money, or at least another $100k-$150k, so your net should be closer to $400k+ as 1099 if you want to max out a CB plan. A spouse can also be included in this calculation, but this makes the set up a bit more complex, and at that income I would recommend being taxed as S corp (both for tax purposes and for retirement plan contribution purposes).

[Slav4ikMD]

Thanks Kon, this is exactly what I wanted to know.  Much appreciated.  Sounds like something to consider down the line when and if I fully transition to private practice and all or most of my earnings will be 1099.

[Franky]

Thank you for this great thread!  I’ve learned a lot.

I wondered if I could ask the participants for your advice on a topic that I find a bit complex for me.  I just turned 40, have a very good employee/partner income from my w2 physician-owned practice, and a reasonable side income from my 1099 consulting work.  I currently contribute the max allowable to my employer sponsored 401k plan ($18k per year) from my annual salary, and my group makes the maximum allowed profit sharing contribution of $15.9k/year.   I have been funding a solo-401k from my side 1099 income, do my full annual back door Roth conversions, and front-load my annual stealth IRA/HSA.

My “big picture" question is this:  my employer/physician group (where I am a full partner and an employee), also has a cash balance plan (hybrid with the 401k).  I have been contributing $20k/year for the past 2 years to this defined benefit  plan from the profit-sharing/bonus component of my W2 income (I believe that for my age, the current annual limit per year is about around $66k).

I now have the opportunity to increase my annual contributions to this cash balance plan significantly, up to at least ~$72k per year given my age and years left to retirement, or if the group chooses a “front-loaded” option, quite a bit more per year for less numbers of years ($200k+ per year).  I don’t have significant high-interest debt or children currently, and my insurance needs are met.  In past years, I’ve had enough disposable cash left after maxing out my other retirement accounts, that I’ve placed large sums of money into taxed brokerage accounts and considered real estate investing, but now this option of putting much more money into the company’s cash balance plan presents itself.

From what I’ve read in your writings and elsewhere, the above employer/group sponsored defined benefit plan can be a great tax arbitrage especially for older professionals who need to catchup or add to their retirement savings.  Given my age of 40, and the cash balance plan's modest return rate of ~4%, I have wondered if this is the best time/age for me to contribute to such a plan, vs. putting the same money now into potentially higher returning (albeit taxed and perhaps higher risk) options such as my own personal taxable investment accounts or real estate for long-term growth, and hope to contribute to my life-time limits for cash balance plans later on in my older years?  I do understand that at some point the in the future, there may be an opportunity for our group to dissolve the current cash balance plan and roll over each person’s funds into individual IRA’s allowing more aggressive investment returns while protecting the tax benefits, but that event and time-line is far from certain.  Furthermore,  I’m also somewhat weary of the cash balance plan’s long-term solvency and the overall risks to our “company” (namely myself and the younger partners) over the long-term:  I’m one of the youngest partners in our 8-physician group,  more than half of our group is now close to retirement or will potentially be retirement age in the next  10 years and potentially in a position to withdraw large sums from the fund and perhaps during an economic down-turn, and the inherent uncertainties in the intermediate and long term financial health of any medical group/system including ours.

I wondered if you have any advice or thoughts for me regarding the above?   Am I overthinking the risks?  Should I just view the potential tax arbitrage as well- worth the potential plan/company risks, and hope for an option to roll over the cash balance funds into an individual IRA at some point in the future?

Secondly, any thoughts about “front-loading” the CBP as opposed to an even-loaded plan for someone in my situation?  For the hopes of maximizing contributions early and then closing the pan to roll over into an individual IRA? Eitherway, my group's unofficial plan is to terminate the plan after X (5-10?) years, and allow the individuals to roll over their

funds into their own retirement accounts.  My understanding was that
regardless of the plan being front or even-loaded, the group (or each
individual via their 1099 income?) could then restart a CBP in the future
(even a few years later) and continue contributing to their lifetime
maximum.  If I'm understanding this correctly, the plan's front vs.
even-loading should not make a difference in the ability to close the plan
and restart at another time to contribute to one's life-time maximum?

Related to this, I had read in some of your WCI posts that front-loading
for a younger doc may decrease the lifetime tax-deferred dollars that are
eligibile for CBP contributions (my understanding is that its because the
initial additional funds have longer to accrue interest and grow, which add
to the life-time maximum *benefit? *allowed in the plan and take away from
room available for later tax-deferred contributions).  Am I understanding
this correctly?

And one more question if you dont mind.  I'd also read that front-loading
may add the risk of the group/company plan being "over-funded" too early
and limiting the group or the individual's ability to terminate the plan or
withdraw individual funds, until such time that the plan is no longer
considered over-funded.  Am I understanding this risk correclty?
This may especially be a concern if older physicians contribute huge
amounts (which is likely in my group).

Thank you again!

[litovskyassetmanagement]

Yes, there is indeed a risk when there is a mismanaged CB plan with high risk allocation.  You can typically take extra risk on the 401k side since the CB plan's allocation is supposed to be conservative (given the potential risks/uncertainties).  I also don't think that at 40 you can contribute $200k even if you front-load, and this number might be lower, but that's something your actuary should be able to explain.  You can indeed restart a CB plan later on, but ideally it a great idea to put in as much money into one as you can especially you are in the highest tax bracket, precisely because you don't know whether you will be able to open one such plan later on.

So I'd do the following:

1) Get an IPS for the CB plan and make sure that the allocation takes into account potential risks of market downturn/practice termination, etc.  Your CB allocation ideally has to be manage conservatively (all bonds which are low cost index funds), with no AUM fees of any kind, to allow for all of the return to be credited to you.

2) Look at your overall allocation and your retirement plans and see how you should structure your allocation under various CB contribution scenarios.

Before you can make a decision on what to do, your CB plan has to be totally under control so that you don't have to worry about having to endure losses if/when the plan is liquidated (which can also happen when the group is absorbed by a hospital, or joins another group, which happens quite often).  Once your CB plan is 'stabilized', then you can make a decision regarding over-funding, which I would think is a good one if you can indeed put a lot of money into the CB plan.  Once it is maxed out at $2.6M, you simply roll that into a 401k, and if you over-fund, you will do so within probably 10 years or so, thus at that point you'll have more control over your overall asset allocation.