The number of cash balance plans grew 32% in 2013 to reach 12,721, the most recent year for which Internal Revenue Service (IRS) reporting data is available, according to a report from Kravitz. By comparison, the number of 401(k) plans grew by 3% in 2013. Today, cash balance plans make up 28% of all defined benefit plans, up from just 2.9% in 2001.
Most cash balance plans (89%) are offered in companies with fewer than 100 employees, according to “2015 National Cash Balance Research Report.” Companies contributed $35.8 billion to cash balance plans in 2013, bringing their total assets to $952 billion. Employers contribute an average of 6.3% of an employee’s pay when they offer both a cash balance and 401(k) plan. By comparison, they contribute only an average of 2.8% of pay when they offer a 401(k) plan alone.
The IRS’ decision to allow broader investment options in cash balance plans in 2010 are making the vehicles even more popular, Kravitz said. Nearly one quarter, 23%, of all new cash balance plans in 2013 were opened in New York and California.
NEXT: What’s driving the popularity
As to what is driving the popularity of cash balance plans,
Kravitz said it’s the ability for employers to deduct contributions to employee
retirement accounts from their taxes. Also, since cash balance plans combine
the high contribution limits of a defined benefit plan with the flexibility and
portability of 401(k) plans, they have hybrid appeal. Furthermore, with so many
news articles about how Baby Boomers will be unprepared for
retirement, older business owners want to help their employees accelerate their
Today, some cash balance plans have websites, making the vehicles easier for participants to understand and appreciate. The plans allow for more consistent contributions to employees, rather than age-based contributions. Account balances can be rolled over to an individual retirement account (IRA), which is important since many Americans change jobs frequently. As with any IRS-qualified retirement plan, cash balance assets are protected in the event of a lawsuit or bankruptcy. Finally, cash balance plans are an attractive recruitment offering.
Cash balance plans are most commonly found in health care, technical, legal and financial sectors. “With many CRP and financial advisory organizations educating clients about cash balance plans, we expect even greater diversification of business types adding these plans,” Kravitz said. “Thanks to steadily increasing demand for creative plan designs combining cash balance, 401(k) and profit sharing, top retirement plan consultants are finding new opportunities to develop a niche specialty with a competitive edge.”
Kravtiz’s full report can be downloaded here.
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