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  • Cash Balance Plan question

    https://www.whitecoatinvestor.com/ca...ement-account/

    I found this post and read it. I had our group HR leader reach out to our 401k company to inquire. They’ve set up a call for next week to discuss.

    Anyone have any personal experience with CBP in their group? Pros/Cons?

    We are a single specialty group of partners/owners. Currently we are 5 partners and 4 employed physicians that will be partners w/i 12 months.

    Any help would be appreciated and what to look out for as we move forward with the initial due diligence.

    Thank you

  • #2
    Your 401k provider will have an actuary run an analysis. This should tell you what percent of the contributions to the plan each participant should get. This will be dependent on demographics etc. You will then have to make a decision on whether it is worth it. For me, we get the overwhelming majority of the contributions, so it was an easy decision. There are quite a few nuances you will need to consider, such as the investment portfolio, its pretty conservative. There is a target return that the plan is aimed to achieve, so depending on the market, your contributions may/will change year to year. As as aside, they CAN be very expensive to manage but don't need to be. If the cost is a problem, I recommend you look for additional options. Good luck.

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    • #3
      Ute, thank you for the advice. So can we choose from other options to manage the CBP?

      Comment


      • #4
        I would highly recommend using the same fiduciary and actuary for a 401(1)k profit sharing and a cash balance plan. This made implementation painless for our group last year.

        Have the actuary run numbers and give you a break down of what each physician can fund into the CBP and what the practice will have to fund on behalf of each employee (safe harbor). Then, ask what the initial start up price and annual ongoing expenses will be. This will give you a rough idea of the annual expense.

        I had to lay all of this out very clearly to get supermajority vote in my group. Several partners didn't understand a CBP and had financial advisors who were trying to push their own agenda IMO.

        I ran forward projections and showed each partner what the tax arbitrage benefit would be if we ran the plan for 5 years with a interest credit rate of 4%. This part is important because my experience is that many docs have unrealistic expectations of market returns given recent performance bias. The outliers came to my side very quickly.

        One important thing I think we often look over is that a CBP is also beneficial to your employees! Make sure you explain to them that your practice is helping fund their retirement, but that this should NOT and CANNOT replace the earning potential of their 401k contributions, only supplement.

        Comment


        • #5
          My group has a CBP for 3+ years. Some tips/suggestions:

          1. Have the same TPA for your 401k and CBP. Group used to use Kravitz for our CBP who would not serve as a TPA. This resulted in Kravitz and our 401k plan provider/TPA working through our office staff who had no idea what each was asking for. We switched from Kravitz last year.

          2. Pick a conservative return for the CBP. We picked 4%. This minimized the stress on the practice if the stock market tanks. You can always be more aggressive in your brokerage and other tax-deferred accounts to balance out the money in the CBP.

          3. Whoever you find to manage the CBP investment should be paid a flat fee. Being charged assets under management (AUM) is going to cost you a lot of money over time. Paying a 1% AUM while trying to get a 4% return is

          4. Be clear who is responsible for the CBP liability. The employer i.e. the group is ultimately responsible for the contributions. I made it clear to the partners participating in the CBP that they are individually responsible for their own contributions including any shortfall. I set aside their expected annual contribution from their salary at the start of each year and refund/deduct the difference when the final numbers become available in July-Aug. The partners equally share in the employee contributions.

          5. You do not want highly compensated employees on the CBP. You can't force an employee to make up for a shortfall in the plan. If you add employed physicians and/or highly paid employed staff to the plan it will significantly increase the amount the group is responsible for. Our CBP excludes employed physicians; only partner physicians and office staff can join. For the office staff I let the actuary determine what would be the best choice cost-wise.

          Comment


          • #6
            Originally posted by zlandar View Post
            My group has a CBP for 3+ years. Some tips/suggestions:

            1. Have the same TPA for your 401k and CBP. Group used to use Kravitz for our CBP who would not serve as a TPA. This resulted in Kravitz and our 401k plan provider/TPA working through our office staff who had no idea what each was asking for. We switched from Kravitz last year.

            2. Pick a conservative return for the CBP. We picked 4%. This minimized the stress on the practice if the stock market tanks. You can always be more aggressive in your brokerage and other tax-deferred accounts to balance out the money in the CBP.

            3. Whoever you find to manage the CBP investment should be paid a flat fee. Being charged assets under management (AUM) is going to cost you a lot of money over time. Paying a 1% AUM while trying to get a 4% return is

            4. Be clear who is responsible for the CBP liability. The employer i.e. the group is ultimately responsible for the contributions. I made it clear to the partners participating in the CBP that they are individually responsible for their own contributions including any shortfall. I set aside their expected annual contribution from their salary at the start of each year and refund/deduct the difference when the final numbers become available in July-Aug. The partners equally share in the employee contributions.

            5. You do not want highly compensated employees on the CBP. You can't force an employee to make up for a shortfall in the plan. If you add employed physicians and/or highly paid employed staff to the plan it will significantly increase the amount the group is responsible for. Our CBP excludes employed physicians; only partner physicians and office staff can join. For the office staff I let the actuary determine what would be the best choice cost-wise.
            BUMP Points 4. and 5.

            VERY IMPORTANT.

            Comment


            • #7
              I really appreciate the advice and time spent in the replies. It was very helpful advice. Agree on the point about benefiting employees. I wish more would actually use our 401k, but we can’t make them.

              Comment


              • #8
                Originally posted by hillaj1 View Post
                I would highly recommend using the same fiduciary and actuary for a 401(1)k profit sharing and a cash balance plan. This made implementation painless for our group last year.

                Have the actuary run numbers and give you a break down of what each physician can fund into the CBP and what the practice will have to fund on behalf of each employee (safe harbor). Then, ask what the initial start up price and annual ongoing expenses will be. This will give you a rough idea of the annual expense.

                I had to lay all of this out very clearly to get supermajority vote in my group. Several partners didn't understand a CBP and had financial advisors who were trying to push their own agenda IMO.

                I ran forward projections and showed each partner what the tax arbitrage benefit would be if we ran the plan for 5 years with a interest credit rate of 4%. This part is important because my experience is that many docs have unrealistic expectations of market returns given recent performance bias. The outliers came to my side very quickly.

                One important thing I think we often look over is that a CBP is also beneficial to your employees! Make sure you explain to them that your practice is helping fund their retirement, but that this should NOT and CANNOT replace the earning potential of their 401k contributions, only supplement.
                Your group is fortunate to have you there to run quarterback for them - I hope they realize that.
                Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

                Comment


                • #9
                  Originally posted by Stringtown View Post
                  https://www.whitecoatinvestor.com/ca...ement-account/

                  I found this post and read it. I had our group HR leader reach out to our 401k company to inquire. They’ve set up a call for next week to discuss.

                  Anyone have any personal experience with CBP in their group? Pros/Cons?

                  We are a single specialty group of partners/owners. Currently we are 5 partners and 4 employed physicians that will be partners w/i 12 months.

                  Any help would be appreciated and what to look out for as we move forward with the initial due diligence.

                  Thank you
                  This is an ideal set up for a CB plan. For one thing, you will not be a PBGC plan so your PS will be limited to 6%. However, this way you can potentially do after-tax contributions going forward, and this way you can do the mega backdoor Roth 401k up to $58k despite the 6% limitation. Details have to be worked out though, but it is possible.

                  Regarding Kravitz recommendation above, I would not recommend them. You want either your own company do the actuarial work if they can, or you want to hire your own actuary. With Kravitz you work with reps, not your own actuary, so you will not get nearly the same level of advice as you get by hiring your own actuary, and they are not cheap by any means.

                  Also, you don't get to 'pick' your crediting rate. It is set by the actuary based on the plan design, and this depends on the practice demographics. It is usually set to be 3%-5% or so depending on the best design.

                  Keeping all of your fees fixed/flat is the way to go for both the 401k and CB plans, and it is definitely important to understand how CB plan portfolio should be managed given that these plans are short-term (usually 10 years unless your group grows and has at least 40% participation after 10 years) and with really low return (any return in excess of crediting rate is taxed at 100%, so there is no incentive to have higher return in these types of plans).

                  I've written extensively on how CB plans work here:
                  https://www.whitecoatinvestor.com/ca...oup-practices/
                  Kon Litovsky, Principal, Litovsky Asset Management | [email protected] | 401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

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