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A Financial Advisor’s Guide to
Cash Balance Plans
www.nyhart.com
Presented by Charles Munsell
and Karl Willman
Charles Munsell
charles.munsell@nyhart.com
(317) 845-3570
Karl Willman
karl.willman@nyhart.com
(317) 845-3592
ACTUARY &EMPLOYEE BENEFITS
Established in 1943, Nyhart is an ESOP
with 115 employees and offices in
Indianapolis, Chicago,...
ACTUARY &EMPLOYEE BENEFITS
22 Actuaries Consulting In 48 States.
Nyhart is one of the nation’s largest
independent actuari...
www.nyhart.com
Actuaries by location
Indianapolis
Thomas L. Totten, FSA, FCA, EA, MAAA
Tayt V. Odom, FSA, FCA, EA, MAAA
Jo...
Agenda
 What are cash balance plans?
 How do the plans work?
 What is the role of the advisor?
 Real-world example.
 ...
Why Defined
Benefit?
 Limit is on the benefit,
not the contribution
 Can fund towards
target in excess of $2.5
million d...
What is a cash
balance plan?
What is a Cash
Balance Plan?
 A hybrid defined
benefit plan
 Looks and acts like a
401(k) plan from a
benefits perspecti...
Why a cash balance
plan?
Why a Cash
Balance Plan?
 A defined benefit plan
 Can be leveraged with
401(k) plan
 Combined plans tested
as one
 Muc...
How do they work?
How do they
work?
 Takes advantage of
defined benefit nature
of plan
 Takes advantage of
nondiscrimination
testing rules...
How do we not
discriminate?
 Plan must be non-
discriminatory
 IRS provides
framework for testing
 Take advantage of th...
Pros & Cons
 Large contributions
are allowed
 Investing for a pool
 Benefits are fixed and
guaranteed
 Favorable
Deter...
Who is an ideal
candidate for a
cash balance plan?
• Doctors, dentists, lawyers, business
owners and other high income
professionals
• Entities with strong cash flow
• Entit...
Why would a client
want a cash balance
plan?
REASONS
why a client want a cash balance plan:
1.The contributions are tax deductible.
2.The contributions are tax deducti...
Any other
reasons?
 This is a Qualified Plan
as defined by the IRS
 Assets protected from
creditors
 Rollover and defer...
Cash Balance Plan 415 Dollar Limits for 2015
Age Limit Age Limit Age Limit
35 $68,369
36 $71,838 46 $117,962 56 $194,048
3...
What is the
advisor’s role?
 Handle investments
 Plan sponsor
education (but no
participant education)
How are the
investments
different?
 No participant direction of
investments
 Investments are in a pool
and invested for ...
LET’S LOOK AT A
COUPLE OF
SCENARIOS
Case Study
24
• Dr. Martin makes $500,000/yr
• Staff of 3 employees, total payroll =
$129,927
• Maximum 401(k) limitation is $53k
for 20...
CASESTUDY
Name Salary 401k DC
Cash
Balance Total
*Tax
Savings
Dr. Martin $500,000 $24,000 $7,950 $205,800 $237,750 $95,100...
– Dr. Martin receives $237,750
contribution rather than a maximum
$53,000 contribution to a 401k plan
– 94% of total contr...
• Physician group with 13 partners
• Staff of 10 employees
• Maximum 401(k) limitation is $53k
for 2015
• Typical design w...
CASESTUDY
Name 401k DC
Cash
Balance Total
*Tax
Savings
Each
Partner
$18,000 -
$24,000
$35,000 $51,000 -
$250,000
$104,000 ...
– 12 of 13 partners receive maximum
contribution based upon their age with
cash balance plan rather than a
maximum $53,000...
How to win
business
(or strengthen your existing
relationships)
HOW TO WIN BUSINESS WITH CASH BALANCE PLANS
– Most clients are in 403(b), 401(k), etc.
– Cash balance plans are “new” to m...
HOW TO WIN BUSINESS WITH CASH BALANCE PLANS
The advisors we work with
often use the cash balance
plan as a way into to win...
HOW TO WIN BUSINESS WITH CASH BALANCE PLANS
Now is the time to set up the
plan to get 2015 tax savings –
so you can call w...
HOW TO WIN BUSINESS WITH CASH BALANCE PLANS
Nyhart administers over 250 of these plans on
an annual basis.
Generally docto...
How we work
1. You get employee
census & data from
client
2. Nyhart prepares
cash balance plan
study and analysis
report
3...
How we work
1. You get employee
census & data from
client
2. Nyhart prepares
cash balance plan
study and analysis
report
3...
In Conclusion
• Cash balance plans provide large
tax benefits to owners.
• Cash balance plans provide large
retirement acc...
ANY QUESTIONS?
This concludes our discussion
A Financial Advisors Guide to Cash Balance Retirement Plans
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A Financial Advisors Guide to Cash Balance Retirement Plans

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The Cash Balance plan is a unique retirement tool that enables high income professionals maximize their own retirement savings while maintaining a benefit for their staffs. Actuary Chuck Munsell and pension designer Leah DeMartino will present a guide for Financial Advisors, brokers and RIAs on how cash balance plans work and provide examples of strategies to position the cash balance plan offer to win new clients and provide greater value to these high income individuals who need more aggressive options than a 401(k) or other standard retirement benefit plans.

Updated January 2015

Published in: Economy & Finance, Business
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  • Areas of Expertise Include:

    Cash Balance Plan
    Defined Benefit & Pension
    Defined Contribution & 401(k)
    Employee Stock Ownership Plan (ESOP)
    Flexible Spending, HRA & HSA
    Healthcare Actuarial Consulting

    Learn more at www.nyhart.com
  • Areas of Expertise Include:

    Cash Balance Plan
    Defined Benefit & Pension
    Defined Contribution & 401(k)
    Employee Stock Ownership Plan (ESOP)
    Flexible Spending, HRA & HSA
    Healthcare Actuarial Consulting

    Learn more at www.nyhart.com
  • Areas of Expertise Include:

    Cash Balance Plan
    Defined Benefit & Pension
    Defined Contribution & 401(k)
    Employee Stock Ownership Plan (ESOP)
    Flexible Spending, HRA & HSA
    Healthcare Actuarial Consulting

    Learn more at www.nyhart.com
  • What is a cash balance plan?
    Why would a client want a cash balance plan?
    Who are the right targets?
    Role of the advisor
    Real example
    Winning business with a cash balance plan
    Conclusion

  • Obviously, advisors handle the investments
    Advisors may also consult on the fiduciary aspects of the plan
    Typical ERISA fiduciary rules apply
    Plan must be prudently invested
    Investing for cash balance plans are different than 401k plans
    Differences
    No participant direction of investments
    Investments are in a pool and invested for the pool
    No education of participants for investments (plan sponsor, however, still must be educated)
    Goal is not necessarily maximum return
    Many plans are structured to reduce volatility
    Plans tend to be conservatively invested




  • A cash balance plan is a qualified retirement plan
    Contributions are tax deductible
    Earnings are tax deferred
    Lump sums can be rolled into an IRA

    A cash balance plan is a defined benefit plan with all its warts

    Cash balance plan looks like a 401k plan
    Fictitious accounts are generated for each person
    The employer “makes” a contribution for the employee
    For example, 5% of employees pay
    The account grows with a stipulated interest rate
    For example, 1 year T-Bill interest rate
    Benefit design is governed by plan document
    Generally a companion to a 401k plan

  • Obviously, advisors handle the investments
    Advisors may also consult on the fiduciary aspects of the plan
    Typical ERISA fiduciary rules apply
    Plan must be prudently invested
    Investing for cash balance plans are different than 401k plans
    Differences
    No participant direction of investments
    Investments are in a pool and invested for the pool
    No education of participants for investments (plan sponsor, however, still must be educated)
    Goal is not necessarily maximum return
    Many plans are structured to reduce volatility
    Plans tend to be conservatively invested




  • A cash balance plan is a qualified retirement plan
    Contributions are tax deductible
    Earnings are tax deferred
    Lump sums can be rolled into an IRA

    A cash balance plan is a defined benefit plan with all its warts

    Cash balance plan looks like a 401k plan
    Fictitious accounts are generated for each person
    The employer “makes” a contribution for the employee
    For example, 5% of employees pay
    The account grows with a stipulated interest rate
    For example, 1 year T-Bill interest rate
    Benefit design is governed by plan document
    Generally a companion to a 401k plan

  • Obviously, advisors handle the investments
    Advisors may also consult on the fiduciary aspects of the plan
    Typical ERISA fiduciary rules apply
    Plan must be prudently invested
    Investing for cash balance plans are different than 401k plans
    Differences
    No participant direction of investments
    Investments are in a pool and invested for the pool
    No education of participants for investments (plan sponsor, however, still must be educated)
    Goal is not necessarily maximum return
    Many plans are structured to reduce volatility
    Plans tend to be conservatively invested




  • A cash balance plan is a qualified retirement plan
    Contributions are tax deductible
    Earnings are tax deferred
    Lump sums can be rolled into an IRA

    A cash balance plan is a defined benefit plan with all its warts

    Cash balance plan looks like a 401k plan
    Fictitious accounts are generated for each person
    The employer “makes” a contribution for the employee
    For example, 5% of employees pay
    The account grows with a stipulated interest rate
    For example, 1 year T-Bill interest rate
    Benefit design is governed by plan document
    Generally a companion to a 401k plan

  • Obviously, advisors handle the investments
    Advisors may also consult on the fiduciary aspects of the plan
    Typical ERISA fiduciary rules apply
    Plan must be prudently invested
    Investing for cash balance plans are different than 401k plans
    Differences
    No participant direction of investments
    Investments are in a pool and invested for the pool
    No education of participants for investments (plan sponsor, however, still must be educated)
    Goal is not necessarily maximum return
    Many plans are structured to reduce volatility
    Plans tend to be conservatively invested




  • Obviously, advisors handle the investments
    Advisors may also consult on the fiduciary aspects of the plan
    Typical ERISA fiduciary rules apply
    Plan must be prudently invested
    Investing for cash balance plans are different than 401k plans
    Differences
    No participant direction of investments
    Investments are in a pool and invested for the pool
    No education of participants for investments (plan sponsor, however, still must be educated)
    Goal is not necessarily maximum return
    Many plans are structured to reduce volatility
    Plans tend to be conservatively invested




  • Entities with strong cash flow
    Pension contributions are required by law
    Actuary makes the annual contribution calculation
    Entities looking for tax deductions and willing to save for retirement
    Owners who are older rather than younger
  • A cash balance plan is a qualified retirement plan
    Contributions are tax deductible
    Earnings are tax deferred
    Lump sums can be rolled into an IRA

    A cash balance plan is a defined benefit plan with all its warts

    Cash balance plan looks like a 401k plan
    Fictitious accounts are generated for each person
    The employer “makes” a contribution for the employee
    For example, 5% of employees pay
    The account grows with a stipulated interest rate
    For example, 1 year T-Bill interest rate
    Benefit design is governed by plan document
    Generally a companion to a 401k plan

  • In addition, the benefits are tilted, in a dollar fashion, to the owner.
  • Obviously, advisors handle the investments
    Advisors may also consult on the fiduciary aspects of the plan
    Typical ERISA fiduciary rules apply
    Plan must be prudently invested
    Investing for cash balance plans are different than 401k plans
    Differences
    No participant direction of investments
    Investments are in a pool and invested for the pool
    No education of participants for investments (plan sponsor, however, still must be educated)
    Goal is not necessarily maximum return
    Many plans are structured to reduce volatility
    Plans tend to be conservatively invested




  • Obviously, advisors handle the investments
    Advisors may also consult on the fiduciary aspects of the plan
    Typical ERISA fiduciary rules apply
    Plan must be prudently invested
    Investing for cash balance plans are different than 401k plans
    Differences
    No participant direction of investments
    Investments are in a pool and invested for the pool
    No education of participants for investments (plan sponsor, however, still must be educated)
    Goal is not necessarily maximum return
    Many plans are structured to reduce volatility
    Plans tend to be conservatively invested




  • Obviously, advisors handle the investments
    Advisors may also consult on the fiduciary aspects of the plan
    Typical ERISA fiduciary rules apply
    Plan must be prudently invested
    Investing for cash balance plans are different than 401k plans
    Differences
    No participant direction of investments
    Investments are in a pool and invested for the pool
    No education of participants for investments (plan sponsor, however, still must be educated)
    Goal is not necessarily maximum return
    Many plans are structured to reduce volatility
    Plans tend to be conservatively invested




  • The advisors we work with use the cash balance plan as a differentiator
  • In order for the cash balance plan to pass nondiscrimination rules, the plans must be aggregated for testing
    Plan sponsor does not want to work with multiple firms
  • Nyhart is the back-end solution and administrator for the plan.
  • Firms, such as Nyhart, provide free plan census studies to show illustrations on how cash balance plans can benefit the owners. These reports generate significant impact during the client discussion and because you can offer this analysis for free (Nyhart does not charge you or the client for this analysis), you have a significant door opener.
  • What is a cash balance plan?
    Why would a client want a cash balance plan?
    Who are the right targets?
    Role of the advisor
    Real example
    Winning business with a cash balance plan
    Conclusion

  • Transcript of "A Financial Advisors Guide to Cash Balance Retirement Plans"

    1. 1. A Financial Advisor’s Guide to Cash Balance Plans www.nyhart.com Presented by Charles Munsell and Karl Willman
    2. 2. Charles Munsell charles.munsell@nyhart.com (317) 845-3570 Karl Willman karl.willman@nyhart.com (317) 845-3592
    3. 3. ACTUARY &EMPLOYEE BENEFITS Established in 1943, Nyhart is an ESOP with 115 employees and offices in Indianapolis, Chicago, Atlanta, St. Louis, Kansas City, Houston, Denver and San Diego. Areas of Expertise Include: • Cash Balance Plan • Defined Benefit & Pension • Defined Contribution & 401(k) • Employee Stock Ownership Plan • Flexible Spending, HRA & HSA • Healthcare Actuarial Consulting Learn more at www.nyhart.com
    4. 4. ACTUARY &EMPLOYEE BENEFITS 22 Actuaries Consulting In 48 States. Nyhart is one of the nation’s largest independent actuarial and employee benefit firms, consulting to and administering the plans for clients with more than $14 billion in assets. Our team of benefit advisers deliver personalized analysis and recommendations, translating complex calculations and issues into common language that enables corporations, associations, churches and governments to effectively manage their retirement and health care benefits.
    5. 5. www.nyhart.com Actuaries by location Indianapolis Thomas L. Totten, FSA, FCA, EA, MAAA Tayt V. Odom, FSA, FCA, EA, MAAA John L. Dowell, FSA, FCA, EA, MAAA Randy Gomez, FSA, FCA, MAAA Ryan Bedel, ASA, CPC Carter Angell, FSA, EA John Cierzniak, EA Matt Sherertz, ASA, EA Karl Willman, ASA, EA Charles Munsell, III, EA, MSPA Evi Laksana, ASA Malcolm Merrill, ASA, EA Atlanta Randall Stanley, FSA, FCA, EA, MAAA David Harris, ASA, EA, MAAA Kimberly Lovingood, FSA, EA Chicago Mike Zurek, EA Houston Dan Homan, EA, MAAA San Diego Teena Sarkissian, EA, CPC, MAAA, MSPA Marilyn Jones, ASA, FCA, EA, MAAA St. Louis Heath Merlak, FSA, FCA, EA, MAAA Nick Meggos, EA
    6. 6. Agenda  What are cash balance plans?  How do the plans work?  What is the role of the advisor?  Real-world example.  How to start winning new business.
    7. 7. Why Defined Benefit?  Limit is on the benefit, not the contribution  Can fund towards target in excess of $2.5 million dollars for principal
    8. 8. What is a cash balance plan?
    9. 9. What is a Cash Balance Plan?  A hybrid defined benefit plan  Looks and acts like a 401(k) plan from a benefits perspective  More robust from a funding perspective
    10. 10. Why a cash balance plan?
    11. 11. Why a Cash Balance Plan?  A defined benefit plan  Can be leveraged with 401(k) plan  Combined plans tested as one  Much larger deductions available  Easy to understand
    12. 12. How do they work?
    13. 13. How do they work?  Takes advantage of defined benefit nature of plan  Takes advantage of nondiscrimination testing rules  Typically designed with owner focus
    14. 14. How do we not discriminate?  Plan must be non- discriminatory  IRS provides framework for testing  Take advantage of the “miracle” of compound interest
    15. 15. Pros & Cons  Large contributions are allowed  Investing for a pool  Benefits are fixed and guaranteed  Favorable Determination letter issued by IRS × Contributions are mandatory under law × Contributions could be volatile, based upon asset performance and interest rates × Government insurance depending upon size and structure
    16. 16. Who is an ideal candidate for a cash balance plan?
    17. 17. • Doctors, dentists, lawyers, business owners and other high income professionals • Entities with strong cash flow • Entities looking for tax deductions and willing to save for retirement • Owners who are older rather than younger WHOTO TARGET?
    18. 18. Why would a client want a cash balance plan?
    19. 19. REASONS why a client want a cash balance plan: 1.The contributions are tax deductible. 2.The contributions are tax deductible. 3.The contributions are tax deductible.
    20. 20. Any other reasons?  This is a Qualified Plan as defined by the IRS  Assets protected from creditors  Rollover and deferral of taxes available upon distribution from plan  Provides a significant retirement benefit
    21. 21. Cash Balance Plan 415 Dollar Limits for 2015 Age Limit Age Limit Age Limit 35 $68,369 36 $71,838 46 $117,962 56 $194,048 37 $75,484 47 $123,973 57 $203,968 38 $79,317 48 $130,292 58 $214,397 39 $83,346 49 $136,936 59 $225,362 40 $87,581 50 $143,921 60 $236,891 41 $92,034 51 $151,265 61 $249,013 42 $96,714 52 $158,987 62 $261,757 43 $101,634 53 $167,105 63 $256,128 44 $106,807 54 $175,640 64 $250,416 45 $112,245 55 $184,613 65 $244,579
    22. 22. What is the advisor’s role?  Handle investments  Plan sponsor education (but no participant education)
    23. 23. How are the investments different?  No participant direction of investments  Investments are in a pool and invested for the pool  Goal is not necessarily maximum return  Many plans are structured to reduce volatility  Plans tend to be conservatively invested
    24. 24. LET’S LOOK AT A COUPLE OF SCENARIOS Case Study 24
    25. 25. • Dr. Martin makes $500,000/yr • Staff of 3 employees, total payroll = $129,927 • Maximum 401(k) limitation is $53k for 2015 • Typical design would be a 401k safe harbor and new comparability design ($53k max) CASESTUDY
    26. 26. CASESTUDY Name Salary 401k DC Cash Balance Total *Tax Savings Dr. Martin $500,000 $24,000 $7,950 $205,800 $237,750 $95,100 Employee1 $61,154 $0 $4,113 $1,500 $5,613 $2,245 Employee 2 $29,023 $0 $4,975 $726 $5,701 $2,280 Employee 3 $39,750 $0 $2,674 $994 $3,667 $1,467 Total Staff $129,927 $0 $11,762 $3,220 $14,981 $5,992 Grand Total $252,731 $101,092 Percent To Target 94% *Assuming a 40% tax rate; taxes are deferred only.
    27. 27. – Dr. Martin receives $237,750 contribution rather than a maximum $53,000 contribution to a 401k plan – 94% of total contribution went to owner – Tax savings of $101,092 more than paid for employee cost to get there – Design choices can skinny costs further depending upon circumstances CASESTUDY Interpretation
    28. 28. • Physician group with 13 partners • Staff of 10 employees • Maximum 401(k) limitation is $53k for 2015 • Typical design would be a 401k safe harbor and new comparability design ($53k max) CASESTUDY
    29. 29. CASESTUDY Name 401k DC Cash Balance Total *Tax Savings Each Partner $18,000 - $24,000 $35,000 $51,000 - $250,000 $104,000 - $309,000 Total Partners $237,000 $440,500 $1,460,700 $2,138,200 $855,280 Total Staff $0 $88,480 $6,300 $94,780 $37,912 Grand Total $237,000 $528,980 $1,467,000 $2,232,980 $893,192 Percent To Target 96% *Assuming a 40% tax rate; taxes are deferred only.
    30. 30. – 12 of 13 partners receive maximum contribution based upon their age with cash balance plan rather than a maximum $53,000 contribution to a 401k plan – 96% of total contribution went to the physician group – Tax savings of $893,192 more than paid for employee cost to get there CASESTUDY Interpretation
    31. 31. How to win business (or strengthen your existing relationships)
    32. 32. HOW TO WIN BUSINESS WITH CASH BALANCE PLANS – Most clients are in 403(b), 401(k), etc. – Cash balance plans are “new” to most clients – Most clients are very interested in the tax savings with the ability to save for retirement – As future tax rates may rise, it is a good time to discuss cash balance plans The advisors we work with use the cash balance plan as a differentiator
    33. 33. HOW TO WIN BUSINESS WITH CASH BALANCE PLANS The advisors we work with often use the cash balance plan as a way into to win the 401(k) business.
    34. 34. HOW TO WIN BUSINESS WITH CASH BALANCE PLANS Now is the time to set up the plan to get 2015 tax savings – so you can call with an urgency and specific benefit of value.
    35. 35. HOW TO WIN BUSINESS WITH CASH BALANCE PLANS Nyhart administers over 250 of these plans on an annual basis. Generally doctors, dentists and small owner firms that are profitable. Our largest plan in 2015 has 203 employees, and 43 highly compensated participants… Cash flow into plans can exceed $4,000,000 per year
    36. 36. How we work 1. You get employee census & data from client 2. Nyhart prepares cash balance plan study and analysis report 3. Nyhart prepares complete plan packet and guide – cobranded with your name and services. 4. You present the plan study to client to win business 5. If a “go” then Nyhart handles all admin, while you focus on client education and investment decisions.
    37. 37. How we work 1. You get employee census & data from client 2. Nyhart prepares cash balance plan study and analysis report 3. Nyhart prepares complete plan packet and guide – cobranded with your name and services. 4. You present the plan study to client to win business 5. If a “go” then Nyhart handles all admin, while you focus on client education and investment decisions.
    38. 38. In Conclusion • Cash balance plans provide large tax benefits to owners. • Cash balance plans provide large retirement accounts. • Qualified plan with the IRS • Cash balance plans offer the opportunity to sell 401k plans.
    39. 39. ANY QUESTIONS? This concludes our discussion

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