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 …

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.

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  • What is a cash balance plan?Why would a client want a cash balance plan?Who are the right targets?Role of the advisorReal exampleWinning business with a cash balance planConclusion
  • A cash balance plan is a qualified retirement planContributions are tax deductibleEarnings are tax deferredLump sums can be rolled into an IRAA cash balance plan is a defined benefit plan with all its warts Cash balance plan looks like a 401k planFictitious accounts are generated for each personThe employer “makes” a contribution for the employeeFor example, 5% of employees payThe account grows with a stipulated interest rateFor example, 1 year T-Bill interest rateBenefit design is governed by plan documentGenerally a companion to a 401k plan
  • Entities with strong cash flowPension contributions are required by lawActuary makes the annual contribution calculationEntities looking for tax deductions and willing to save for retirementOwners who are older rather than younger
  • A cash balance plan is a qualified retirement planContributions are tax deductibleEarnings are tax deferredLump sums can be rolled into an IRAA cash balance plan is a defined benefit plan with all its warts Cash balance plan looks like a 401k planFictitious accounts are generated for each personThe employer “makes” a contribution for the employeeFor example, 5% of employees payThe account grows with a stipulated interest rateFor example, 1 year T-Bill interest rateBenefit design is governed by plan documentGenerally a companion to a 401k plan
  • In addition, the benefits are tilted, in a dollar fashion, to the owner.
  • Obviously, advisors handle the investmentsAdvisors may also consult on the fiduciary aspects of the planTypical ERISA fiduciary rules applyPlan must be prudently investedInvesting for cash balance plans are different than 401k plansDifferencesNo participant direction of investmentsInvestments are in a pool and invested for the poolNo education of participants for investments (plan sponsor, however, still must be educated)Goal is not necessarily maximum returnMany plans are structured to reduce volatilityPlans tend to be conservatively invested
  • Obviously, advisors handle the investmentsAdvisors may also consult on the fiduciary aspects of the planTypical ERISA fiduciary rules applyPlan must be prudently investedInvesting for cash balance plans are different than 401k plansDifferencesNo participant direction of investmentsInvestments are in a pool and invested for the poolNo education of participants for investments (plan sponsor, however, still must be educated)Goal is not necessarily maximum returnMany plans are structured to reduce volatilityPlans 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 testingPlan 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 advisorReal exampleWinning business with a cash balance planConclusion
  • 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 ConsultingLearn 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 ConsultingLearn more at www.nyhart.com

Transcript

  • 1. A Financial Advisor’s Guide to Cash Balance Plans Presented by Charles Munsell and Leah DiMartino www.nyhart.comCopyright 2011. All Rights Reserved.
  • 2. Charles Munsell Leah DiMartinoSenior Actuary Plan Designercharles.munsell@nyhart.com leah.dimartino@nyhart.com(317) 845-3570 (317) 845-3525
  • 3. 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.
  • 4. What is a cashbalance plan?
  • 5. Pros & Cons Large contributions × Contributions are are allowed mandatory under law Investing for a pool × Contributions could be volatile, based upon Benefits are fixed and asset performance and guaranteed interest rates × Government insurance depending upon size and structure
  • 6. Who is an idealcandidate for acash balance plan?
  • 7. WHO TO TARGET? • 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
  • 8. Why would a clientwant a cash balance plan? 8
  • 9. REASONSwhy 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.
  • 10.  Handle investments What is the  Fiduciary consultingadvisor’s role?  Plan sponsor education (but no participant education)
  • 11.  No participant direction of investments  Investments are in a pool and invested for the poolHow are the  Goal is not necessarilyinvestments maximum return different?  Many plans are structured to reduce volatility  Plans tend to be conservatively invested
  • 12. Case StudyLET’S LOOK AT AREAL SCENARIO 12
  • 13. CASE STUDY • Dr. Martin makes $500,000/yr • Staff of 3 employees, total payroll = $129,927 • Maximum 401(k) limitation is $49k for 2011($54,500 if catch-up eligible) • Typical design would be a 401k safe harbor and new comparability design
  • 14. CASE STUDY Cash Tax Name Salary 401k DC Balance Total Savings Dr. Martin $500,000 $22,000 $7,350 $205,800 $235,150 $74,603 Employee1 $61,154 $0 $4,113 $1,500 $5,613 $1,965 Employee 2 $29,023 $0 $4,975 $726 $5,701 $1,995 Employee 3 $39,750 $0 $2,674 $994 $3,667 $1,284 Total Staff $129,927 $0 $11,762 $3,220 $14,983 $5,224 Grand Total $250,133 $79,847 Percent To Target 94%
  • 15. CASE STUDY Interpretation – Dr. Martin receives $235,150 contribution vs. a maximum $49k ($54.5k catch-up) contribution to a 401k – 94% of total contribution went to owner – Tax savings of $79,847 more than paid for employee cost to get there – Design choices can impact costs further depending upon circumstances
  • 16. How to win business(or strengthen your existing relationships)
  • 17. HOW TO WIN BUSINESS WITH CASH BALANCE PLANS The advisors we work with use the cash balance plan as a differentiator – Most clients are in SEPS, 401k, 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
  • 18. 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.
  • 19. HOW TO WIN BUSINESS WITH CASH BALANCE PLANS Now is the time to set up the plan to get 2011 tax savings – so you can call prospects with a sense of urgency and a specific call to action.
  • 20. HOW TO WIN BUSINESS WITH CASH BALANCE PLANSNyhart set-up more than 30 plans in thelatter part of 2010 in partnership withadvisors.Generally doctors, dentists and smallowner firms that are profitable.Our largest plan in fall 2010 had 150employees, and 30 highly compensatedparticipants…Cash flow into plan was more than $4,000,000 per year
  • 21. How we work 4. You present the plan study to client to win business 3. Nyhart prepares complete plan packet and guide – cobranded with your name 5. If a “go” then Nyhart and services. handles all admin, while you focus on client education and investment decisions. 2. Nyhart prepares cash balance plan study and analysis report1. You get employeecensus & data fromclient
  • 22. How we work 4. You present the plan study to client to win business 3. Nyhart prepares complete plan packet and guide – cobranded with your name 5. If a “go” then Nyhart handles and services. all admin, while you focus on client education and investment decisions. 2. Nyhart prepares cash balance plan study and analysis report1. You get employeecensus & data fromclient
  • 23. In Conclusion• Cash balance plans provide large tax benefits to owners.• Cash balance plans provide high cash flow opportunities to advisors.• Cash balance plans offer the opportunity to sell 401k plans.
  • 24. This concludes our discussionANY QUESTIONS?
  • 25. Charles Munsell Leah DiMartinoSenior Actuary Plan Designercharles.munsell@nyhart.com leah.dimartino@nyhart.com(317) 845-3570 (317) 845-3525
  • 26. Sign upWhere is the So for Peak? more webinars Register for upcoming educational events on pensions, 401(k), healthcare and other actuarial and employee benefits topics at: www.nyhart.com
  • 27. ACTUARY &EMPLOYEE BENEFITS Established in 1943, Nyhart is an ESOP with 84 employees and offices in Indianapolis, Chicago, Atlanta and Kansas City. 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
  • 28. ACTUARY &EMPLOYEE BENEFITS 16 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.