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  • Cash balance? Do I or don't I?

    Hey everyone.  Gathering the wealth of knowledge available on these pages and trying to put my finances in order.  Would appreciate some insight.

     

    I'm a partner in a 20 member private group (K1), 37 years old.  I currently max out my 401k and HSA.  Also have backdoor Roths for my wife and I.  Student loans have been consolidated and being paid down aggressively despite relatively low interest rates (highest is 3.375).

     

    A cash balance plan is available to me through my group.  I'm told that their 'aim' is 5-6%, whatever that means, but obviously have been well above that with the recent financial environment.  Older guys in my group say its a great option for reducing taxable income, so I began thinking of contributing.  But then I ran into a friend's financial advisor the other day and curbside him.  He started saying I'm far too young to invest in cash balance plans, especially considering I'm not at my peak earnings.  He recommended that I invest in a market account now, leave the cash balance for when I'm older and making more.  So what gives?  What am I missing here?

  • #2
    I would ask the FA for the specific reasons he thinks you should bypass the CB plan. Why are you too young to participate, for example? This is a no-brainer to me. Unless you, as a partner, are voting on whether to change from a DB plan to a CB plan (and there would be positives and negatives to both), then a CB plan will only help you build your retirement and lower current taxable income. Look at the plan document and make sure it has an option to roll over a lump sum at retirement. If it's not in the plan, ask to have the plan amended to include that option.
    Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

    Comment


    • #3




      Hey everyone.  Gathering the wealth of knowledge available on these pages and trying to put my finances in order.  Would appreciate some insight.

       

      I’m a partner in a 20 member private group (K1), 37 years old.  I currently max out my 401k and HSA.  Also have backdoor Roths for my wife and I.  Student loans have been consolidated and being paid down aggressively despite relatively low interest rates (highest is 3.375).

       

      A cash balance plan is available to me through my group.  I’m told that their ‘aim’ is 5-6%, whatever that means, but obviously have been well above that with the recent financial environment.  Older guys in my group say its a great option for reducing taxable income, so I began thinking of contributing.  But then I ran into a friend’s financial advisor the other day and curbside him.  He started saying I’m far too young to invest in cash balance plans, especially considering I’m not at my peak earnings.  He recommended that I invest in a market account now, leave the cash balance for when I’m older and making more.  So what gives?  What am I missing here?
      Click to expand...


      This seems to be their typical response really. I dont care for it really, its a general response based on a general idea of the general worker. Theres almost a certainty that you arent that. It'd probably be good to talk to someone with that kind of thing in mind. I think its very useful even if your goals are different than what its supposed to be for (late catch ups). WCI has a couple articles about his and changes theyve made I think.

      Comment


      • #4
        Maybe I am missing something here, why wouldn't you invest in the plan?   I wouldn't set one up if your as young as you are because the benefit isn't as great for you as the older partners, but if its set up already and the group has it in place I think you would be crazy not to use it.

        Comment


        • #5


          A cash balance plan is available to me through my group.  I’m told that their ‘aim’ is 5-6%, whatever that means, but obviously have been well above that with the recent financial environment.  Older guys in my group say its a great option for reducing taxable income, so I began thinking of contributing.  But then I ran into a friend’s financial advisor the other day and curbside him.  He started saying I’m far too young to invest in cash balance plans, especially considering I’m not at my peak earnings.  He recommended that I invest in a market account now, leave the cash balance for when I’m older and making more.  So what gives?  What am I missing here?
          Click to expand...


          Defined benefit or cash balance plans have to be structured differently than other retirement accounts, like defined contribution plans such as a 401(k) etc, because they have to guarantee the defined benefit over a period of time, and as such they tend to have a higher balance of cash and fixed-income securities.  Contribution and withdrawal amounts are based on actuarial tables and therefore vary with age, length of employment, and income history: older workers who have been with the company longer will have much higher contributions since benefit payout is usually based on years of service and hence requires higher contributions to guarantee.

          There are generally relatively high fees for CBPs (esp for self-employed) because of the administrative red tape they carry, but if this comes from the partnership's expenses and not from your contributions, then I'd imagine it shouldn't affect you as much and would just be another tax-deferred asset.

          Being younger, your contribution limit will not be as high as the older partners, but it's still a deduction you wouldn't otherwise get and should be thought of as forming part the future fixed-income allocation of your portfolio.

          Understand the above is in the context of my never having set one up or managed one, and as such I am not intimately familiar with DBP/CBPs.  I would expect Konstantin Litovsky (who administers retirement plans including DBP/CBPs for a living) to weigh in; you may consider sending him a message if he doesn't.

          Comment


          • #6




            Hey everyone.  Gathering the wealth of knowledge available on these pages and trying to put my finances in order.  Would appreciate some insight.

             

            I’m a partner in a 20 member private group (K1), 37 years old.  I currently max out my 401k and HSA.  Also have backdoor Roths for my wife and I.  Student loans have been consolidated and being paid down aggressively despite relatively low interest rates (highest is 3.375).

             

            A cash balance plan is available to me through my group.  I’m told that their ‘aim’ is 5-6%, whatever that means, but obviously have been well above that with the recent financial environment.  Older guys in my group say its a great option for reducing taxable income, so I began thinking of contributing.  But then I ran into a friend’s financial advisor the other day and curbside him.  He started saying I’m far too young to invest in cash balance plans, especially considering I’m not at my peak earnings.  He recommended that I invest in a market account now, leave the cash balance for when I’m older and making more.  So what gives?  What am I missing here?
            Click to expand...


            He's totally wrong, and probably just wants your AUM. You just never know how long you will be employed and whether you will have the opportunity to contribute later.  I would by all means contribute as much as you can.  However, judging from your description your plan portfolio is mostly invested in stocks and is highly volatile.  I would worry about that.  If the older partners leave after a market crash, they would definitely get 100% of their guaranteed amount. However, the younger partners would have to make it up to the plan via higher employer contribution, so for that reason I do not recommend a high volatility portfolio in a relatively small group practice plan like yours.  In fact, I prefer mostly bonds because this mostly eliminates the issue of market volatility especially if the plan is to terminate unexpectedly or if older partners withdraw large sums of money after a market crash.  You can easily make up for a more conservative Cash Balance plan returns by increasing your 401k plan allocation to stocks.

            Also, I would worry about the cost of fees in your CB account. If you max out your CB plan contribution, in 10 years you will not be able to contribute anymore.  The money will sit there until you change jobs or the plan terminates.  At that point you can roll it into a 401k plan, but until then you will be paying any AUM fees (which can be quite high in some plans).

            So before investing find out what exactly your plan portfolio is, what is the fund expense ratio and what is the management fee, and whether your portfolio is managed by an ERISA 3(38) fiduciary (this makes a big difference vs. just a broker or any other adviser).  I would still contribute even if you plan to work for the practice for 10+ years because you simply never know what will happen.  If you plan to change jobs, you can contribute to ANOTHER CB plan going forward.  Your lifetime maximum is only tied to a single employer.  So if you start your own practice or have multiple employers, you can contribute to other CB plans going forward.  Lots of variables, but at least you have some way of making an informed decision.
            Kon Litovsky, Principal, Litovsky Asset Management | [email protected] | 401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

            Comment


            • #7
              My group has a cash balance plan and ~120 physicians. I'm not partner, and I believe I have to be a partner to contribute to this. But in the mean time, is there any good reading material out there on CB plans that you'd recommend so I can familiarize myself with them in general?

              Comment


              • #8
                I'm 33 and I contribute the max (for me this year it will be (20k). Our's targets a 4% rate of return. It helps fill out the bond portion of my desired asset allocation and I get to save some money on my taxes. Not many of the younger partners in my group participate in our plan but I think that will change as many of our recent hires are cut from the WCI/Boglehead method of thinking.

                Comment


                • #9







                  Hey everyone.  Gathering the wealth of knowledge available on these pages and trying to put my finances in order.  Would appreciate some insight.

                   

                  I’m a partner in a 20 member private group (K1), 37 years old.  I currently max out my 401k and HSA.  Also have backdoor Roths for my wife and I.  Student loans have been consolidated and being paid down aggressively despite relatively low interest rates (highest is 3.375).

                   

                  A cash balance plan is available to me through my group.  I’m told that their ‘aim’ is 5-6%, whatever that means, but obviously have been well above that with the recent financial environment.  Older guys in my group say its a great option for reducing taxable income, so I began thinking of contributing.  But then I ran into a friend’s financial advisor the other day and curbside him.  He started saying I’m far too young to invest in cash balance plans, especially considering I’m not at my peak earnings.  He recommended that I invest in a market account now, leave the cash balance for when I’m older and making more.  So what gives?  What am I missing here?
                  Click to expand…


                  He’s totally wrong, and probably just wants your AUM. You just never know how long you will be employed and whether you will have the opportunity to contribute later.  I would by all means contribute as much as you can.  However, judging from your description your plan portfolio is mostly invested in stocks and is highly volatile.  I would worry about that.  If the older partners leave after a market crash, they would definitely get 100% of their guaranteed amount. However, the younger partners would have to make it up to the plan via higher employer contribution, so for that reason I do not recommend a high volatility portfolio in a relatively small group practice plan like yours.  In fact, I prefer mostly bonds because this mostly eliminates the issue of market volatility especially if the plan is to terminate unexpectedly or if older partners withdraw large sums of money after a market crash.  You can easily make up for a more conservative Cash Balance plan returns by increasing your 401k plan allocation to stocks.

                  Also, I would worry about the cost of fees in your CB account. If you max out your CB plan contribution, in 10 years you will not be able to contribute anymore.  The money will sit there until you change jobs or the plan terminates.  At that point you can roll it into a 401k plan, but until then you will be paying any AUM fees (which can be quite high in some plans).

                  So before investing find out what exactly your plan portfolio is, what is the fund expense ratio and what is the management fee, and whether your portfolio is managed by an ERISA 3(38) fiduciary (this makes a big difference vs. just a broker or any other adviser).  I would still contribute even if you plan to work for the practice for 10+ years because you simply never know what will happen.  If you plan to change jobs, you can contribute to ANOTHER CB plan going forward.  Your lifetime maximum is only tied to a single employer.  So if you start your own practice or have multiple employers, you can contribute to other CB plans going forward.  Lots of variables, but at least you have some way of making an informed decision.
                  Click to expand...


                  I agree with Kon's thoughts on this and nothing more to add except was this financial advisor you cornered the advisor on the CB plan or just someone else's advisor?  It does scream he wants your assets to manage and therefore charge you a fee. Participating in this plan seems like an easy decision on the surface, but do ask some more questions.

                  Comment


                  • #10




                    My group has a cash balance plan and ~120 physicians. I’m not partner, and I believe I have to be a partner to contribute to this. But in the mean time, is there any good reading material out there on CB plans that you’d recommend so I can familiarize myself with them in general?
                    Click to expand...


                    I have an article in the works on CB plans that should be rather comprehensive, since lots of stuff you find online just has bits and pieces.  Hopefully it will be published in 3-4 months on WCI. In the meanwhile, do ask for your group's CB plan document and start reading that.  Probably not the easiest reading, but this should give you more idea about the plan than reading anything else.  You can then look things up as you need and ask questions in the meanwhile.
                    Kon Litovsky, Principal, Litovsky Asset Management | [email protected] | 401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

                    Comment


                    • #11
                      Reviving this old thread for some updated advice...

                      Deciding to do the cash balance plan and am being told by ADP they don't know how to record it on my W2. Can anyone offer advice? Will plan on contributing 75k for 2020.

                      Does this get included under 401k $ plan cmp mtch? Thats the best option I could come up with. If not, where/how do I ask ADP to record the 75k? They were not helpful despite my requesting they escalate it to a manager.

                      Thanks in advance


                      Comment


                      • #12
                        Originally posted by flushbb View Post
                        Reviving this old thread for some updated advice...

                        Deciding to do the cash balance plan and am being told by ADP they don't know how to record it on my W2. Can anyone offer advice? Will plan on contributing 75k for 2020.

                        Does this get included under 401k $ plan cmp mtch? Thats the best option I could come up with. If not, where/how do I ask ADP to record the 75k? They were not helpful despite my requesting they escalate it to a manager.

                        Thanks in advance

                        CBP is a deductible expense of the business. Happens before payroll occurs. Doesn’t go anywhere on W2.

                        is this a group plan or a solo plan?

                        Comment


                        • #13
                          Thanks

                          Still trying to wrap my head around this. It CBP doesn't have to go anywhere on my ADP paperwork, then why does the employer contribution portion of my 401k get listed?

                          Its a group plan.

                          Comment


                          • #14
                            Originally posted by flushbb View Post
                            Thanks

                            Still trying to wrap my head around this. It CBP doesn't have to go anywhere on my ADP paperwork, then why does the employer contribution portion of my 401k get listed?

                            Its a group plan.
                            I don’t believe there is any mandate that your employer contribution to your 401(k) needs to go on your W-2. Note I am not a CPA or a payroll specialist.

                            If this is a group plan, why are you communicating with ADP about this?

                            Comment


                            • #15
                              Originally posted by flushbb View Post
                              Deciding to do the cash balance plan and am being told by ADP they don't know how to record it on my W2. Can anyone offer advice?
                              Ditch ADP? In my personal opinion, they aren’t that great. We went from ADP to SurePayroll (now owned by ADP’s arch nemesis Paychex). There probably are some pretty good SurePayroll competitors out there today too.

                              As for the cash balance plan (DB), get an employee census to see what makes sense. If the age, seniority, pay, etc. of the staff vs. owner(s) makes sense, then go with the DB plan. At 39 and a member of a 20 practitioner practice, you may not be able to put more than $75K into the cash balance plan. That’s a shame, but it still is some pretty nice tax arbitrage.

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