Rethinking Retirement Benefits: Cash Balance Plans for Small- to Mid-Sized Businesses
Cash balance plans are growing in popularity among small- to mid-sized businesses looking to offer more competitive retirement benefits. Blending the predictable structure of traditional pensions with the flexibility of defined contribution plans like a 401(k), these plans can be attractive to professional services firms and companies with consistent profits.
About Cash Balance Plans
Essentially, cash balance plans are defined benefit plans. Each year, participants receive a credit to a hypothetical account, typically consisting of a percentage of their salary plus interest. Unlike traditional pensions, participants can see the value of their benefit accrue in a format that looks and feels more like a 401(k). For business owners or high earners, the contribution limits exceed those of a 401(k), creating an additional opportunity for tax-deferred savings.
For owners, this setup can allow additional retirement savings beyond what’s permitted through a 401(k) alone. These contributions are also tax-deductible for the business, which can create significant tax planning benefits. For high-income employees, the additional employer-funded contributions may provide valuable retirement support without increasing their taxable income today.
Attracting and Retaining Talent
The potential benefits of a cash balance plan go beyond the numbers. These plans can be effective tools for attracting and retaining top talent, especially in competitive industries. With a typical vesting schedule of three to five years, employees have an incentive to stay and continue contributing to the firm’s success. The predictable nature of the account growth can build trust and reinforce the value of the benefit over time. A mid-career professional comparing offers may see a more compelling future with a firm that offers a market salary, a solid 401(k) match, and a $15,000 to $20,000 annual credit to a cash balance plan.
Cash balance plans make the most sense for firms with steady revenue and owners who are focused on maximizing pre-tax savings while improving employee benefits, such as law firms, medical groups, accounting practices, and other closely held professional services organizations. The potential tax deductions can be substantial, while the long-term benefit to partners and top employees helps make the firm more attractive.
Key Takeaways
When evaluating whether to add a cash balance plan, there are several key takeaways. High-performing staff members may receive consistent and meaningful retirement contributions, helping improve financial security and morale. Recruiting may become easier with an attractive compensation package, and retention could improve with vesting schedules and guaranteed benefits. Finally, the business itself may benefit from large, strategic tax savings.
With careful design and proper administration, a cash balance plan can be more than just a retirement vehicle; it could become a long-term strategy for growth, talent retention, and financial efficiency. For firms looking to take their retirement planning to the next level, this plan type offers a powerful and practical solution.
This is intended for informational purposes only. You should not assume that any discussion or information contained in this document serves as the receipt of, or as a substitute for, personalized investment advice from Savant. Please consult your investment professional regarding your unique situation.
Patricia L. Hutchinson
Director of Retirement Plan Services
AIF®, MBA