Solving Your Cash Balance Plan Headaches
Introduction
Defined benefits plans have historically been an important way for workers in the U.S. to set aside money for long-term savings and retirement. Interestingly, they date back to the Revolutionary War, when the young U.S. government first offered service pensions to officers in 1781 to prevent mass desertion. Defined benefits (or DB) plans, primarily pensions, proliferated as the U.S. workforce grew more industrialized. Fast forward to the mid-1980s when employers shifted away from pensions to 401k defined contribution (or DC) plans to lower their costs and risk. This same era saw the rise of cash balance plans, a/k/a “hybrid” savings plans that are defined benefits maintained on an individual account basis like a DC plan, but with a lifetime annuity option. Today, the use of cash balance plans continues to rise as the fastest-growing sector of the retirement plan market, with a broad, multi-sector appeal. Managing the administration of these plans comes with some complexity.
Cash Balance Plan Basics
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% of compensation from the employer) and an “interest credit” (either a fixed rate or a variable rate that is linked to an index such as the one-year treasury bill rate).
Cash balance plans require more specialized administrative management, especially in terms of 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. This requires defined benefit administrative systems to incorporate cash balance capabilities into a system designed for pension (annuity) benefits. In traditional defined benefit plan administration systems, the primary focus is on calculating an annuity benefit at Normal, Early, or Delayed Retirement and then calculating other optional forms of distributions, including lump sums. With cash balance plan administration, the focus is on calculating a participant’s benefit similar to a defined contribution plan style, with an opening balance, interest crediting rate, and ending balance to determine a lump sum amount payable. Very often, they require converting the cash balance to an annuity and various optional forms like traditional defined benefit plans.
As a result, it is complicated and costly for plan sponsors to use an administration system that was originally designed for traditional defined benefit plans for cash balance plans. A platform that meets the unique needs of cash balance plan administration, with integrated workflows, benefit calculations, engagement, an analytics platform, and advanced digital features is crucial to maintaining the intricacies of cash balance plan administration.
Cash Balance Administration Features
An administration system that supports complex cash balance plan administrative functions and includes out-of-the-box-capabilities that streamline calculations and funds distribution can solve a host of headaches. While some plan sponsors have developed in-house systems with manual workarounds that remain inefficient, costly to maintain, and fail to provide digital self-service expectations of plan participants and employers, a fully automated system, specifically for cash balance plan administration can easily process difficult data and contractual rules that reduce operational efficiency, in addition to often-inconsistent census and other plan participant data from pension plan sponsors. Capabilities for data loading, scrubbing, and comparison are other important features to consider.
A system that integrates with workflows, campaign management, documents and correspondence and extensive APIs to streamline business processes and share tools that provide data across all relevant departments and systems (marketing, compliance, printing/mail room, call center, valuation) can significantly reduce operation expense Giving cash balance plan participants the same level of information and transparency as defined contribution plans in a defined benefit administration system, as well as an intuitive digital self-service, with access to view online balances, will greatly enhance the customer experience.
Final Thoughts
In today’s employer benefits market, cash balance plans are now growing faster than traditional 401k offerings. With the proliferation of these plans, sponsors need a technology solution that supports their administrative complexities, including onboarding, administration, and automated benefit calculations. A solution that that provides these capabilities in one robust platform, with enhanced digital capabilities, advanced reporting, and omnichannel options, to deliver a contemporary and personalized customer experience throughout the cash balance plan lifecycle will ease the pain points of plan administration.
To see how Vitech’s V3locity solution can enhance your defined benefits, cash balance plan, or PRT operations, click here.
