Total time: 14:04
0:01
Bob Moser: Hello, my name is Bob Moser. I'm the national director at Sage Advisory, and I am joined by Michael Walton, who's our managing director and principal at Sage as well. And we figured you probably haven't had enough podcasts over this COVID time to view. So what? Why not add one more? Our goal today is to discuss cash balance plans. For those of you that have a short attention span such as myself, don't worry. We're not going to bore you with super details here and there. But we're going to give you what I would say is good conversations good points to help you position this to clients and provide you with the resources available to help you along the way. So as I look at this, there are really two key points that I'd like you to keep in mind before we get going. And that's one, we've been doing this for a really, really long time at Sage. We've been very successful in this space. And we've got solutions for large plans and scalable solutions for startup plans. Second, I would tell you, you don't have to fly this plane alone. And what I mean by that is partnering with us, you have a copilot where we possess the wisdom and the resources to help you along the way. So, again, just take this for what it is. This is going to be a high-level overview of cash balance plans as part of your practice. And I think we should, Michael, really define four questions that you and I receive often, and that is, what is a cash balance plan? Why should someone use a cash balance plan? Who would be a great candidate? And how to make this a successful part of your practice? So let's jump right in. Let's hit the first question, Michael. What is a cash balance plan?
2:09
Michael Walton: Thanks, Bob. Glad to have an opportunity to join you today. And I think you're right. And people have had a lot of podcasts. But let's be honest, like, this is a wildly exciting topic. So I think I have a feeling this podcast is going to stand out among others. To your question, what is a cash balance plan? So first of all, I think it's a sort of an oddly-named retirement plan. Technically, these are defined benefit plans. And what I think is unique about cash balance plans is that they borrow some of the best features of defined benefit plans, traditional defined benefit plans, and 401(k) defined contribution plans. Of course, they are tax qualified under ERISA rules. And what's interesting is that they typically sit alongside a 401(k) or an a profit-sharing plan, so these are additional savings vehicles that go along with a 401(k) and profit sharing.
3:12
Bob Moser: Okay. And the key features?
3:15
Michael Walton: Yeah, so I mentioned how they share some DB- and DC-like quality. So, first of all these are DB plans. So the plan sponsors are on the hook for whatever promises are made, but they're also on the hook for contributions. They’re DB-like in that there can be rather significant benefit accumulation, and the benefits – not to get too much in the weeds, but they the benefits accumulate in two ways. First is through kind of this annual pay-based contribution, but the second is through what's called an interest crediting rate. And it's the growth rate applied to those benefits every year. You know, the way that these are most DC-like is that benefits are portable before retirement. So if you're in a cash balance plan and you leave a company, you can essentially take those benefits and roll them into an IRA, just like you could have 401(k). By the way, all three of those features I mentioned are really important, and should really inform how the investments of these assets should be managed.
4:29
Bob Moser: Okay, why would you use a cash balance in the first place?
4:33
Michael Walton: Yeah, so look, I mean, there's some easy ones, right? I want to accelerate my retirement savings. Let's add this plan for employee retention. There's asset protection. We've even seen it be used for business transition, which I think is really cool. But the number one reason is to reduce taxable income, right? So we can we can distract ourselves with lots of details on interest, credit rates and different investment approaches, but I think we all need to keep in mind that the number one reason why most clients have these in place is to just reduce that tax bill.
5:06
Bob Moser: Great. You and I have seen some pretty sizable contributions over the years. Can you provide our listeners with a high-level overview of why this is?
5:19
Michael Walton: Yeah, without getting too much into the weeds, I mean, it's essentially a function of the maximum lifetime defined benefit under defined benefit laws, several million dollars. It's also a function of age. And so if you're a business owner that's relatively close to retirement, you make a lot of money, there is the potential that you can have a relatively large difference north of $200,000. And again, this is in addition to whatever you're doing in a 401(k) and profit-sharing plan. Or the other thing that's related that I think is worth mentioning is that typically the ratio of benefits for the owners and the employees, if there are any, is also considered to be very attractive. So a way to think about it is owners are often doing right by their employees through the 401(k) or profit-sharing plan, but the cash balance plan, in addition to those things, allows the proportion of benefits to be skewed towards the business owners.
6:17
Bob Moser: Hmm. So who would you say would be a great candidate for a cash balance plan?
6:23
Michael Walton: Yeah, that's a good question. I mean, look, so if you look at the growth track of cash balance plans over the last 20 years, I mean, one, it's the fastest growing part of the ERISA complex, and you've seen consistent growth north of 15%, 20% per year. But when you really dig into the details, most of the work has been with companies that have 25 or fewer employees. So let's start with closely held businesses. Let's think about professional service for, you know, medical practices, dental practices, architects, CPAs, lawyers. They can be sole proprietors; it can be partnerships. So there's that. But I would say let's start with these closely held businesses. But let's be aware of the fact that there's some very large existing cash balance plans in place that are that are well north of $100 million. So it's not just the small plans, but I would say if you're thinking about who would be a good candidate to start with, it’s certainly these closely held businesses.
7:25
Bob Moser: Mm hmm. Well, is there a good way to figure out if some of these closely held businesses or medical experts would be a good candidate?
7:36
Michael Walton: Yeah, I mean, one really good rule of thumb is that in most cases, clients need to be taking advantage of the 401(k) and profit-sharing plan. So if they're not taking full advantage of those two things, a lot of times cash balance isn't going to make sense. But the only way to find out if somebody is a good candidate is to have a TPA, a plan design firm, that has an actuary that has experience doing cash balance plans, put one together. And you know, it only requires a relatively small amount of information from the client; there's typically not a cost involved. And because every client situation is unique, you really do have to have that study in order to see if it makes sense.
8:20
Bob Moser: Good. All right. Thank you. Hey, Michael, you and I both know, you've been helping advisors for a really long time, understand this, this space, navigate some of the headwinds and be very successful in doing it. Can you just share with our listeners how the successful advisors who have embraced cash balance plans have pulled it off?
8:47
Michael Walton: Yeah, that's a good question. So I mean, one, first off, I would say there are lots of parties involved when you want to put a cash balance plan together. And if you want to have sustained success and have this make an impact in your business, you need to find your partners. Obviously, that includes finding a good partner on the plan design side of things. It includes having an investment manager that you feel comfortable with that has expertise in these areas. But I would say you got to do your homework and do your due diligence on the front end and find good partners that not only have a strong command of what needs to be done, but they're really good communicators.
Secondly, I would say that, from the investment side of things, the advisors who have the most success, understand that you can't take a 401(k) approach to managing cash balance plans. You have to respect the unique aspects of cash balance plans and find an investment approach, and an investment manager oftentimes, that can implement with all these unique considerations. I know you mentioned this earlier, but I think it's worth saying again – we manage cash balance plans that are north of $100 million in a very highly custom separately managed account. But we also have these scalable solutions. We have low minimum SMAs, we have a series of collective investment trusts available for startup planning. So we have worked really hard over the last decade to provide investment solutions. But these are all very unique to the cash balance plans.
And the third thing I would say, I think cash balance plans and not only the initial work that has to occur, but on an ongoing basis, you just have to be good at education. And we're constantly reminding clients of how cash balance plans work. You have to remind them of why these cash balance plans are in existence in the first place for their situation. So I would just say find a good partner. Let’s identify an investment approach that’s unique for cash balance plans, and let's commit to being really good on the education front because these are, they can be complicated. They don't have to be in your interactions with clients.
11:02
Bob Moser: Yeah, good. But if possible, I'd like to add a fourth that I've been able to witness over the years. And that's, those that have used cash balance plans as a door opener. It's a non-threatening solution where you're educating either the business owners, the physicians, the architects, etc. And the ones that have been highly successful are those that have gone in, helped them with the cash balance needs, the ERISA planning, and then transitioned over to capture some of their non-qualified assets.
11:40
Michael Walton: Yeah, that's good. That's a really good point. It actually made me think of a, I guess we're at five. But the fifth point is that we have worked with several advisors over the years who have –it's kind of the other side. It's like the warning side of what you just mentioned, that we were through several advisors who have actually lost, whether it's private clients or 401(k) plans, because they never brought up cash balance plans for them. So I think your point is very valid. But I would also keep in mind that there's a responsibility of the advisor to make sure that they at least have this conversation clients.
12:20
Bob Moser: Yeah. Wow, this is great. Well, I hope this was helpful for everyone. If I were in your shoes, I'd probably want them to know, who should I reach out to and how can I contact them if I need help? So I mentioned before, you don't have to go on this journey alone. We are more than happy to be your copilot and assist. So please write down this number: 512-895-4130, and reach out to us. Let us know how we can help and we look forward to meeting you all soon. Thank you. Thanks, Michael.
13:02
Michael Walton: You bet. Thanks everyone. Appreciate it.
13:05
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