The Bare Necessities of Cash Balance Plan Administration

Introduction: The Appeal of Cash Balance Plans

Cash balance plans have become the fastest-growing part of the retirement market, with $1 trillion in retirement plan assets, as they allow small businesses to accelerate tax-deductible pension contributions beyond what is allowable for 401(k) plans. Big corporations continue to convert traditional defined benefit pension plans to cash balance plans because this allows them to avoid unpredictable impacts on income as interest rates and liabilities change. Small businesses, particularly small professional services businesses like doctors, lawyers, consultants, and investment managers, can use cash balance plans to attract and retain employees while minimizing taxes.

What You Need to Know

With cash balance plans, the investment risks are borne solely by the employer, and increases and decreases in the value of the plan’s investments do not directly affect the benefit amounts promised to participants. In a typical plan, a participant’s account is credited each year with a “pay credit” (such as 5 percent of compensation from the employer) and an “interest credit” (either a fixed rate or a variable rate that links to an index such as the one-year treasury bill rate). Increases and decreases in the value of the plans’ investments do not directly affect the benefit amounts promised to participants.

Cash balance plans require specialized administrative management, especially when holding account balances and accruing those account balances with interest (fixed and variable) versus storing and processing an annuity benefit in defined benefit plan administration. With cash balance plan administration, like a defined contribution plan style, the focus is on calculating a participant’s benefit with an opening balance, interest crediting rate, and ending balance to determine a lump sum amount payable. Very often, cash balance plans also require converting the cash balance to an annuity and various optional forms like traditional defined benefit plans.

The Simple Bare Necessities

Some plan sponsors have developed in-house systems with many manual workarounds for cash balance plans that remain inefficient and fail to meet the digital self-service expectations of plan participants and employers. Minimum system requirements must include the ability to process the difficult data and contractual rules that apply to cash balance plans, along with the often-inconsistent census and other plan participant data from pension plan sponsors. Capabilities for data loading, data scrubbing, and data comparison are critical for increasing operational efficiency. Additionally, workflows, campaign management, documents and correspondence, and extensive APIs to streamline business processes and share tools for data spanning across departments must be part of a new system. Plan participants need to have access to the same information and intuitive digital self-service for 24/7 access. Interest rate calculations should also be part of an administration system, supporting flat interest rates or rates based on an index, minimum and/or maximum rates, simple or compound, or day count conventions.

Final Thoughts

In today’s employee benefits market, cash balance plans are now growing faster than traditional 401k offerings, particularly with smaller businesses. With the proliferation of these plans, sponsors need a technology solution that supports their cash balance plan administration complexities – one that includes onboarding, automated benefit calculations, enhanced digital capabilities, advanced reporting, and omnichannel options. Look for a solution that can provide these capabilities in one modern platform to deliver a contemporary customer experience throughout the cash balance plan lifecycle.

i “Cash Balance Plans Gain in Popularity,” PLAN SPONSOR.

About the Author

Paul Panella

Paul Panella is a Director at Vitech with over 20 years of experience with V3locity system implementations. He also serves in a product management role, marrying his pension expertise and exceptional product knowledge to contribute to the introduction of new product features to benefit Vitech clients. He is an expert in pension and benefits administration, and he has particularly deep expertise in both the system and functional aspects of a pension administration solution. Paul lives in New York City and enjoys spending time with his family.