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Love that cash balance plan

By Jennie L. Phipps ·
Thursday, July 26, 2012
Posted: 3 pm ET

Since 2010, when the Internal Revenue Service made the tax implications clearer, cash balance retirement plans have grown increasingly popular, especially among very small businesses and partnerships.

Daniel Kravitz, president of Kravitz Inc., a nationwide retirement planning organization that specializes in administering cash balance plans, offers three key reasons why they are good for employees and for employers as well.

Bigger company contributions. On average, companies that add a cash balance plan while continuing to make 401(k) plans available -- the most common scenario -- more than double their contributions to employee accounts. The average employer contribution to staff cash balance accounts and 401(k)s is 6 percent of pay. That's about three times what employers contribute to a 401(k) plan alone.

Employees don't have to do anything. Cash balance plans don't require contributions from employees, and generally employers manage the money and take on the risks. The plans require steady employer contributions and guaranteed interest, so while you may not get fully rewarded when the market is good, you won't feel much pain when the market goes south. Also, employers usually hire a professional money manager, so you don't have to stay up at night wondering whether to buy or sell. When you change employers, you roll the money into an individual retirement account and take it with you.

Keeps Uncle Sam out of everybody's pockets. Cash balance plans don't have the same limits that 401(k) plans do for both employees and employers. The annual contribution limit on 401(k) savings plans is $50,000 for people younger than 55 and $55,000 for people 55 and older. For many people, this may sound like plenty, but if you are a high earner or you just get a big bonus one year, having both a 401(k) and a cash balance plan will let you shelter more of this windfall. That can be a huge advantage, even for people who are generally modest earners. Plus, the reason the boss can afford to contribute more to these cash balance plans than he does to 401(k)s is their protections from taxes. Often, the money the boss contributes to employee plans would otherwise have gone directly to Uncle Sam. Given a choice, even Scrooge would pick the cash balance plan.

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