Grant Duffield:

Many professional service firms are looking for ways to defer additional taxes for partners and other highly compensated employees. Over the last several years, law firms, medical practices and other firms have taken advantage of cash balance pension plans to provide increased tax deferrals well above the limits for traditional defined contribution plans. In today's session, we will explore how your firm can cash in on cash balance pension plans.

Hi , my name is Grant Duffield and I am OCI director for PNC Institutional Asset Management. Joining me for this discussion are Kim Mathews, director of Pension solutions for PNC, and John Kleiser, who is the actuarial practice leader for October 3.

Let's get started. So, looking at the cash balance landscape today, unlike traditional defined benefit pension plans, which are freezing and in many cases going away, cash balance plans are actually growing in size. There's over 23,000 plans nationwide, representing over 10 million participants and 1.4 trillion in assets. These plans have increased over 206% in the last ten years. They now make up 50% of all defined benefit plans versus 18% just in 2010. Almost 3,000 plans are adopted each year, so there's tremendous growth in the cash balance plan landscape.

Now, why would you consider adding a cash balance plan? You already have a 401(k) and profit sharing plan potentially. Why would you add this plan? Well, the advantage you have qualified money much like your 401(k) and profit sharing plan qualified under ERISA. This is a good thing in that this money is protected from any creditors. Participation in these plans is flexible. Meaning not all people in the organization have to or need to participate. You also have higher contribution limits than you have with 401(k) plans. Also two, these assets are portable, meaning they can be rolled over to an IRA or a 401(k) plan upon termination or upon plan shutdown or retirement. And then it can also be used to attract and retain key employees. So who are the candidates? Well law firms have been one of the biggest adopters, but other professional service firms like engineering firms, healthcare, technology, manufacturing have also benefited. While newly created plans by private equity, venture capital or hedge funds are also coming online. 

John F. Kleiser:

So Brent mentioned that these cash balance plans provide significant additional deferral opportunity . And so I'm here to answer well how much is that? So if we look at this table at age 30 or 35 , the deferral opportunity is almost doubled. At 45 it's tripled. And by the time somebody reaches age 65, our participant is going to be able to defer over $300,000 into a cash balance plan, and that's in addition to the $73,000 that they're able to defer into their DC plans. So oftentimes we'll describe these plans as 401(k) plans on steroids, and you can tell by these deferral levels that that is absolutely true.

Now it's important to note that while certainly there will be some participants in any organization that may want to participate at these maximum levels, many are going to want to participate at a lower level, and I want everybody to know that that is totally fine. Again, one of the other characteristics of these plans, the designs are very, very flexible. So these tables here simply highlight the maximum amount of deferrals that could be available to participants if they truly wanted to max out. 

Kim Matthews: 

So you might be asking what happens to the these deferrals once you put the money in? So, the assets for the cash balance plan is held in a single trust, and each participant's balance will grow at a rate of return of the trust. So many plan sponsors that we see actually look for a more conservative asset allocation that are likely to deliver returns between 4 and 6%. That allows the plan to meet the goal of increasing the amount of deferred comp, and also build the participants wealth. To achieve this, we implement a dynamic investment strategy. So what that includes the core portfolio that is primarily fixed income, that delivers consistent returns, but it also includes the return enhancers like equities in times when fixed income can deliver, for example, in low interest rate environments. While the 4 to 6% is what we see most often, there's full flexibility to incorporate the organization's risk tolerance and growth needs to grow the balances over time. 

Grant Duffield:

Thank you for attending today's session on cashing in on cash balance pension plans. If you'd like to learn more about how your firm can benefit from these plans, please contact PNC Institutional Asset Management directly.