ASK THE EXPERTS – How to Get Started Selling Cash Balance Plans

 Interview Conducted by Roberta Hess of Princeton Marketing

John Markley - Business Development Consultant, Cash Balance Plan SpecialistIn an exclusive pair of interviews, Actuary John Markley provides his insights on Cash Balance Plans — an important and rapidly expanding segment of the retirement market. In this interview, John shares important tips for financial advisors new to Cash Balance Plans, including the invaluable resources provided by The Retirement Advantage, Inc. (TRA).

For financial advisors new to Cash Balance Plans: what are the most important things to know before starting out?

Let’s start with a quick definition for advisors brand-new to this market: A Cash Balance Plan is a type of defined benefit retirement plan that’s often referred to as a “hybrid plan” or a “combo plan,” since it’s offered in tandem with a defined contribution 401(k) plan. Cash Balance Plans are 100% employer funded and portable for employees, who can roll Cash Balance Plan assets over into an IRA if they leave their employers.

Each Cash Balance Plan participant has an account that grows annually in two ways: first, through an employer contribution and second, through an interest credit, which is guaranteed and not tied to the plan’s performance. That makes these plans easy for participants. For each Cash Balance Plan, the employer contribution is determined by a formula specified in the plan document; it can be a percentage of pay or a flat dollar amount.

Another key difference between Cash Balance Plans and 401(k)s: Cash Balance Plans have much bigger annual contribution limits. That means that participants can build substantial tax-deferred accounts much faster in Cash Balance Plans. And that employers can make larger tax-deductible contributions.

Anything else financial advisors should know?

From a practice standpoint, Cash Balance Plans can be easier to set up than 401(k)s, which have to be on a retirement platform and have contributions deducted on a payroll-by-payroll basis. Advisors can put the assets for Cash Balance Plans on their wealth management platforms and get compensated just as they do with other, non-retirement, investments.

And — and this may be the most important point — advisors need to target the right clients for Cash Balance Plans.

Where and how should advisors look for the best-qualified Cash Balance Plan prospects?

The best-qualified prospects will be owners of established businesses; that is, companies that year in, year out have a level of income high enough so they can make contributions to a 401(k) and a Cash Balance Plan. The minimum “rule of thumb” I like to use is $500,000 of annual income, with a possible annual Cash Balance Plan contribution of around $200,000. It’s also great to seek out businesses whose owners are approaching retirement age and would be very receptive to maximizing their retirement savings opportunities.

I would advise steering clear of businesses that never had an employer-sponsored plan or only have had a SIMPLE or SEP. It’s much easier to approach businesses who currently have 401(k) plans and have experience with employer contributions and profit-sharing. Plus, if you’re interested in adding Cash Balance Plans to your practice, you’re probably already doing 401(k) plan business.

Where are advisors most likely to find Cash Balance Plan prospects?

Law firms, of course. Also, larger medical groups — don’t overlook radiology and anesthesiology practices.

CPA practices can also be great Cash Balance Plan candidates. Don’t assume that CPAs already know about the benefits of these plans! One advisor working with TRA has a client who is the managing partner of a CPA firm. The managing partner also has a “side business” of buying and selling other businesses. Until the advisor told him, the partner had no idea that he could sock away $250,000 in income annually from this business — on a totally tax-deductible basis — in a Cash Balance Plan. And, of course, CPAs can be a great source for referrals.

Some more ideal Cash Balance Plan candidates include owner-only employers, financial services firms (including hedge funds), and IT companies.

Can Cash Balance Plans still be set up for the 2021 tax year?

Yes. Amazingly the ability to set up Cash Balance Plans for the 2020 tax year just ended because of SECURE Act! For 2021, businesses have until the end of their tax years to set up Cash Balance Plans. So, with extensions, businesses have until September 15, 2022, to set up new Cash Balance Plans, or October 15, 2022, for sole proprietorships or C corporations.

Starting early always helps, however. For example, over 150 of largest 200 law firms have Cash Balance Plans. They have to do advance planning to properly allocate earnings to their partner/owners while taking their Cash Balance Plan contributions into account.

For an advisor ready to “take the plunge” into Cash Balance Plans, what’s the best next step?

It’s a great time to get started with Cash Balance Plans now, since we know that tax rates are not likely to go lower, making tax-deductible vehicles even more attractive as time goes on.

Start by checking out all the resources that TRA has put at your fingertips. Then contact your Regional Sales Consultant, who will make sure that you have all the information and support you need.

Many advisors just don’t realize the explosive and ongoing growth in the Cash Balance Plan market. I’m not saying it’s always easy setting up a Cash Balance Plan. But if you’re already taking on the work involved with 401(k) plans — selecting plan investments, withholding payroll, and so on — don’t think that Cash Balance Plans will be just as labor-intensive. They’re not.

With TRA’s resources and help, once you get started, Cash Balance Plans will soon become an integral part of your practice — and your clients will thank you for the substantial tax deductions and retirement savings opportunities you’ve provided to them.


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