Pros & Cons of Cash Balance Plans - Scott C. Otermat & Associates

Plan Design The following provide general information for initial discussion with the plan actuary when establishing or reviewing a cash balance plan. Pros & Cons of Cash Balance Plans Pros 1. Cash Balance Plan are generally installed as an ad- dition to 401(k)s or profit sharing plans in order to increase deductions. 2. Costs can be skewed to older employees, who are generally the owners. 3. Cost savings due to partially vested terminations accrue to plan. 4. Excess investment earnings lower future costs. 5. Some pre-funding of benefits is allowed. This adds downside flexibility in the future. 6. Assets are invested as a whole, rather than indi- vidually, thereby reducing investment expenses, and avoiding fee disclosures to participants. 7. Contributions

can often be set to equal amounts for multiple owners of different ages. 8. Benefits are tied to Account Balances which look very much like 401(k) accounts, but which always show positive earnings. Cons 1. Benefit accruals are fixed, so a plan amendment is required to lower costs, unless some pre-funding has occurred. 2. These plans require the services of an actuary to determine contribution ranges and funding levels, so expenses may be higher than 401(k) plans. 3. Funding rules are quite involved. 4. Investment losses require higher future contribu- tions. 5. Cash Balance Plans are more complicated to ter- minate than 401(k) or Profit Sharing Plans. 6. PBGC premiums must be paid if covered by law. 7. Funding levels may restrict lump sum payouts, though this is more uncommon than for tradition defined benefit plans. 8. This type of plan cannot use a prototype docu- ment; the plan document must be individually de- signed. This requires the plan to be filed with the IRS when established or amended, incurring additional plan expense. Scott C. Otermat & Associates For more information, please contact us as (419) 332-0853 or scott@scoassociates.com...

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