Cash balance plans, while still a smaller part of the
retirement world, are growing faster than all other account
types, including 401(k)s.
There were 9,648 cash balance plans active in 2012 (the most
recent year for which complete IRS data is available), up from 7,926 in 2011.
This 22 percent increase was significantly higher than the 1 percent growth
seen in 401(k)s in the same period.
Cash balance plans, also known as hybrid plans, have been rapidly replacing
traditional defined benefit plans. They now make up 25 percent of all defined
benefit plans, up from 3 percent in 2001, according to a report from the
retirement-plan design firm Kravitz Inc.
The report, the 2014 National Cash Balance Research Report,
found that the main engine for this accelerated growth came from small business
with fewer than 100 employees. While large firms have been converting their
defined benefit plans into cash balance plans as a way to cap their pension
liabilities, small firms accounted for 87 percent of cash balance plans.
The plans now have assets approaching $1
trillion. Companies contributed $31.2 billion to cash balance plans in
2012, for a total of $858 billion in cash balance assets nationwide.
Driving this growth are a combination of factors including rising taxes and
broader options for plan sponsors.
More specifically, the report found that increasing federal,
state and local tax rates have pushed many business owners to maximize
tax-deferred retirement savings and take advantage of tax deductions for
contributions to employee retirement accounts.
These plans also have a hybrid appeal, which combines the
high contribution limits of a traditional defined benefit plan “with the
flexibility and portability of a 401(k) plan,” the report said.
Cash balance plans have also benefited from what the report said is “the boomer
generation’s lack of retirement preparedness,” which is prompting older
business owners to accelerate savings and maximize qualified plan
contributions.
As recently as five years ago, many financial professionals were unaware of
cash balance plans and what they provided. Today, “awareness is dramatically
higher and growth has continued to accelerate,” the report said.
All of this has promoted new growth that has soared since
2001, with double-digit annual growth and an increase of more than 600 percent
in 12 years, the report said.
The states with the largest percentage of cash balance plans are New York and
California, which account for 23 percent of all cash balance plans, while the
fastest growth is happening in Texas and Florida.
When a cash balance plan is implemented, companies typically
more than double contributions to employee retirement savings.
The average employer contribution to staff retirement accounts is 6.3 percent
of pay in companies with both cash balance and 401(k) plans, compared with 2.6
percent of pay in firms with 401(k)s alone, according to the report.
Typically, cash balance plans require employers to contribute 5 percent to 8
percent of pay to non-highly compensated employees in order to contribute
larger amounts for the owners. “This is often more than double the contribution
employees receive at firms without cash balance plans,” according to the
report.
The largest firms offering these plans include IBM ($54.9
billion), AT&T ($45 billion) and Boeing ($28 billion).
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