Cash balance plans may be an anomaly for the defined benefit industry in that they actually increased during the Great Recession.
According to John Guido, principal at provider research firm
Retirement Research Inc., there was a minor increase in the retirement vehicle
in 2007, but then “pretty rapid growth” from 2008 through 2011. Especially
rising in growth with companies at the low end of the market, which he
characterizes as those with less than 50 employees and in the couple hundred
thousand to about $5 million in assets range, cash balance plans comprised 10%
of the overall defined benefit universe in 2008 and have risen to 20% of all
plans now.
“When you get close to 10% growth, that’s pretty exciting,”
Guido says. “I can’t say for sure but my suspicion is that advisers and
consultants are driving some of the activity and … I think you’re going to see
more growth.”
For advisers
Most retirement-specific advisers, Guido confirms, are
likely familiar with the cash balance plan option, but other financial and
employee benefit advisers may not be as acquainted. So what is it, exactly?
“Cash balance is a DB plan with some defined
contribution-like features in it,” says Rich Hiller, senior vice president,
government market, at TIAA-CREF. “It has a stated contribution amount but also
promises a certain level of benefits like a DB does.” Hiller cautions that CB
plans should only be used in very specific cases.
“Sometimes what happens with CB plans is that they’re used
as a compromise,” he says. “Companies think, well, we can’t do DB anymore but
we don’t want to do a 401(k), so sometimes they become a compromise that
doesn’t really meet the objectives of the employer or the employee.” He
explains that if the guaranteed earnings rate is too low, then employees won’t
have “adequate” income for retirement. And on the other hand, if the rate is
too high, then employees are more than prepared for retirement, but the
employer is taking on a great deal of funding risk.
That’s why, Guido says, the first place to start for an
adviser who thinks this niche product might be good for a client is to assess
the company’s whole situation, “in terms of number of employees, growth
potential — if you have a slower growth with a more centralized workforce that
you expect to be more tenured a cash balance would maybe be a better way of
going.” And, he says, the aforementioned asset margin should also be factored
in to that analysis.
He adds that the adviser community should definitely be
looking to this vehicle because “there clearly is steady growth.”
TIAA-CREF’s Hiller says there’s another option that advisers
should be aware of in addition to CB plans — what he’s calling a hybrid DB/DC
plan. “In some ways it might look like cash balance, but it’s really two
separate funding vehicles but the DC vehicle is not a 401(k), that’s what’s
really important. It’s a 401(a) … since income is the goal with hybrid so
you’re talking about a much smaller range of investments designed around
long-term.” He explains that unlike traditional DB plans with an income of 2%
of salary multiplied by years of service, the hybrid is taking 1% of income in
the same manner. This is combined with a contribution rate of 5% to 6% for the
DC vehicle.
“What’s important to take away … is that the DC part is
interesting because it’s not wealth accumulation,” it’s retirement readiness,
Hiller says.
Source: Employee
Benefit Adviser
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