ASK THE EXPERTS – Howard Rosenfeld | Actuary – Cash Balance Plans Specialist

 Interview Conducted by Roberta Hess of Princeton Marketing

What You Need to Know About Cash Balance Plans

Howard Rosenfeld joined The Retirement Advantage, Inc. (TRA) in 2021 as an Actuary, Plan Administration, in the Defined Benefit area. Prior to joining TRA, he was Owner/President of Rosenfeld/Tortu Retirement Planning Co., Inc. In this article, Howard draws on his deep expertise in Cash Balance Plans one of the fastest-growing segments of the retirement industry to share why these plans are so popular with advisors and clients.

Before we talk about Cash Balance Plans, can you share your career path before joining TRA?

I was a math major in college and joined the Equitable Life Assurance Society of the United States when I graduated, in the pension/annuity area. That’s where I was introduced to the retirement plan business. I also started pursuing certification as an actuary through the company’s work/study program.

Eventually, I found my way to William M. Mercer – that was like going to grad school for the retirement plan business. I also became an enrolled actuary while at Mercer. When it became time for another career change, I joined National Pension Service, where I worked on small plans as well as large ones – more great experience. Finally, in 1994 my business partner and I decided to go out on our own. We established our firm Rosenfeld/Tortu Retirement Planning with satisfied clients who knew us from prior business relationships.

In 2021, my business partner and I sought out a company with a complementary business model and shared core values focused on client service, industry expertise, and growth. In addition, we wanted to expand overall the products and services we offered our clients. I’m happy to say that we found that company in TRA. TRA’s acquisition of Rosenfeld/Tortu was completed in April 2021.

You’ve been designing and administering Cash Balance Plans for a long time. When and why did these plans start becoming popular?

Yes, I’ve been working on Cash Balance Plans for a long time. I remember when ERISA got passed in 1976, we couldn’t keep up with all the new business in defined benefit plans. Every company wanted a pension plan because they were brand-new and there were big incentives to create plans.

But twenty years later, many pension plans were being frozen or terminated. That’s when Cash Balance Plans – which are a type of defined benefit plan – became attractive because the benefits are based not on the most recent five years’ worth of earnings, but career earnings. Another popular feature is that participants’ retirement benefits are expressed as lump-sum account balances as opposed to future monthly pensions. This makes it much easier to communicate to plan participants.

Between these two factors, Cash Balance Plans started taking over the defined benefit world. And when the IRS issued non-discrimination regulations for retirement plans, Cash Balance Plans really gained momentum. With non-discrimination regulations, of course companies could establish Safe Harbor Plans where all employees basically get the same benefits. But at the same time, non-discrimination testing permits companies to have different benefits for different categories of employees. That allowed business owners to set up Cash Balance Plans where they and other key employees could accrue most of the benefits.

And Cash Balance Plans can offer business owners big tax savings, right?

Absolutely. Advisors can tell their business owner clients that instead of paying 40% on their earned income they can defer taxes on contributions and on their investments in the plan and so accumulate wealth in a major way. Of course, Cash Balance Plans are tax-deferred, not tax free.

Cash Balance Plans sound great for business owners. But are there any potential downsides and how can plans manage the risks?

With Cash Balance Plans, the investment risk is “on” the employer. After all, a Cash Balance Plan is still a defined benefit plan.

If a plan invests aggressively and has some bad years, it may get hit with a required contribution when the sponsor doesn’t want one because business conditions are down. So monitoring is critical  – and that’s what the actuarial team does at TRA. We do an annual evaluation to let sponsors know what the high-end and low-end ranges are for funding their plans and what we recommend they contribute to keep their plans in good financial health. Fortunately, since it’s the business owner who gets most of the benefit from the plan, the down times are more likely to be tolerated.

Also, there is some flexibility to manage through tough market conditions. Sponsors can amend their plans, but there’s a timing issue. Most plans will lock in what the benefits are supposed to be early in the year. So, if the sponsor wants to make a change later in the year, it could be too late. The experts at TRA can help make sure sponsors accomplish what they want to achieve with their plans.

Also, Cash Balance Plans have notice requirements, they have Pension Benefit Guaranty Corporation requirements. Again, here’s where the TRA team is essential in helping plans stay in compliance.

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

Advisors new to Cash Balance Plans should know that they are super-charged retirement plans, since the amount of money business owners can put away is so much higher than with 401(k) plans – and they can do so even close to retirement, which is probably the right time for many successful entrepreneurs.

Here’s a typical scenario: Someone starts their business at age 30. For the first ten years, they are probably plowing everything they can back into the business. Another ten years go by, the business is doing well, and the owner may be interested in saving for retirement, but probably not a lot. By the time the owner is 50, they probably are in a position to start saving for retirement in a big way. With a 401(k) plan, they could make a tax-deferred contribution of about $60,000. But in a Cash Balance Plan that tax-deferred contribution could be $275,000* – a huge difference. And a huge difference in terms of growing a financial advisor’s assets under management, as well. It’s a win for everyone.

*The limitation of the contribution amount in a cash balance plan is a function of the age of the participant and can be higher or lower than $275,000

Do business owners have to have a track record of a “threshold” level of income for Cash Balance Plans?

It’s true that Cash Balance Plans are only for business owners who can afford to set aside the large sums of money that they are going to need to contribute every year to make the plan work.

How much do these annual contributions need to be? Let me answer the question relative to 401(k) plans. In 2022, the maximum amount of money that can be recognized as compensation in any kind of qualified plan is $305,000. So even if a business owner makes $1 million, all we can use in designing their qualified plan is $305,000. Would a business owner with $100,000 in earned income annually be a good candidate for a Cash Balance Plan? Probably not. Cash Balance Plans are really geared for people looking to put away at least $150,000 – $200,000 in contributions each year for the life of the plan.

One potential pitfall for advisors to be aware of: You may come across business owners who are earning a lot of money, but it isn’t all “earned income.” For example, take the owner of an S Corporation. They get a salary and at the end of the year there’s a profit left over from the business. That profit gets taxed to the business owner because they own the business. But that income is considered a dividend – it isn’t part of their W-2 earnings and so it’s “ignored” for defined benefit plan purposes. A business owner in this situation is probably not a candidate for a Cash Balance Plan.

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

Of course, advisors should look at their own books of business first. Owners of small and successful businesses are great prospects, especially if they are increasing their investment portfolios regularly. You can show them how a Cash Balance Plan reduces their taxable income while they accumulate wealth in a tax-deferred plan.

Remember, there’s nothing wrong with a one-person Cash Balance Plan – in fact, it is very appealing to the business owner since all the money going into their own benefit.

If there are employees, the plan will have to cover a requisite number of them to meet non-discrimination regulations. In terms of these regulations, another factor to consider for businesses with employees is that the amount contributed into the Cash Balance Plan on their behalf is very age sensitive. Typically, if a business is staffed with younger people, what you have to contribute becomes a fraction of what you would have to contribute for older employees. That’s the foundation of why non-discrimination rules work. For  businesses where the employees are generally much younger than the owner, a Cash Balance Plan can be very attractive.

For advisors looking beyond their current books of business, accountants and lawyers are great referral sources, since they have clients who are looking for tax-saving strategies. An advisor could host a gathering for these referrals – something as simple as a breakfast – and provide a brief Cash Balance Plan presentation. Think about hosting an event regularly, maybe quarterly, to build up interest over time.

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

TRA has the resources you need to get started. First, take a look at our website. Then register for the upcoming CE credit webinar we’re hosting together with the Retirement Learning Center:

Demand Stays Strong for Cash Balance Plans
Wednesday, September 21, 2022
11:00 a.m. – Noon EDT

Register Today

And the entire TRA team stands ready to respond to whatever questions advisors have about Cash Balance Plans. In addition to the expertise of our actuarial team, we’re providing our Client Relationship Manager and Sales and Marketing Support teams with the ongoing education and information they need to help advisors identify Cash Balance Plan candidates and design plans that will meet their clients’ needs. We’re ready to help advisors start – and grow! – their Cash Balance Plan business.


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