State of the Industry
Shedding Light on DB Plans
Data uncover the growing popularity of the cash balance type
Even as traditional defined benefit (DB) plans are going the way of the dinosaur, cash balance plans remain the fastest growing sector of retirement planning, showing a broadening appeal across market sectors, according to the “2020 National Cash Balance Research Report” from Kravitz, now part of FuturePlan by Ascensus and the firm’s cash balance center of excellence. The latter is a group of experts in cash balance plans led by FuturePlan National Practice Leader and President of Kravitz Inc., in Los Angeles, Daniel Kravitz.
The number of new cash balance plans, he says, increased 17% over 2017 and 2018, based on his firm’s analysis of clients’ Forms 5500 filings for those two years. That growth rate compares with 2% for new defined contribution (DC) plans, he says, noting that the 2018 plan year data from Form 5500 filings is the most current complete set available.
“The motivation for implementing cash balance plans continues to be allowing employees at professional service firms to accrue benefits beyond what’s allowed in 401(k) plans,” Kravitz says. “It used to be mainly law firms driving the trend in new cash balance plans, but now it’s also medical groups, especially specialty medical groups.”
The Cash Balance Research Report cites 21,774 cash balance plans in 2018. While health care agencies, medical groups and law firms make up more than 60% of the market, cash balance plans are becoming more widely known and increasingly popular across the business world. Sectors such as finance, construction and manufacturing have shown steady growth in setting up new plans.
While today’s active traditional DB plans are more apt to be found at large corporations, cash balance plans are popular with small companies. The report reveals that 94% of the plans are at firms with fewer than 100 employees, and 59% have no more than 10 participants. “The needs of small-business owners to catch up on delayed retirement savings and attract top talent are key factors,” the report says.
Those who need to catch up are often professionals who were paying off student loan debt, says Kravitz. “The design allows them to squeeze 20 years-worth of savings into 10 years.”
During the pandemic, some cash balance sponsors froze plan accruals, or, as Kravitz says, “put their plans on pause.” Many have since unfrozen their plan as their firm’s economics have improved, while others are waiting to make sure any recovery they see is long-lasting.
The adoption of new plans stalled during the year-plus of COVID-19, Kravitz says. “It’s difficult to assess exactly why. I’m not sure it was all due to the pandemic. I think COVID did cause some firms financial harm, so they didn’t adopt a plan, but I also think it had something to do with the SECURE [Setting Every Community Up for Retirement Enhancement] Act provision that extended the time allowed for employers to adopt [and fund] a cash balance plan.”
Previously, employers starting a cash balance plan had to fully fund it the year before it became operative. “This caused great concern because employers didn’t know how their businesses would fare in the following year,” Syed Nishat, a partner at Wall Street Alliance Group, in New York City, previously told PLANSPONSOR. With the Coronavirus Aid, Relief and Economic Security (CARES) Act, “Employers can decide to adopt a cash balance plan, and fund it by their tax filing deadline,” Nishat says. “This is better, because they know their business’ budget for the current year.”
Corporate tax increases seem likely, based on President Joe Biden’s stated plans, and “when taxes increase, we see a huge interest in cash balance plans,” says Kravitz. “Owners’ and professional service firms’ motivation for having a plan isn’t just to save for retirement but also to reduce their tax liability.”
Over the past decade, the PLANSPONSOR Defined Benefit (DB) Administration Survey has watched cash balance plans grow from 16% to 21% of the DB plans serviced by a collection of leading plan administrators. Meanwhile, the number of traditional DB plans serviced by the same providers has hovered around 9,000 plans. The mix of those plans, however, has shifted notably. As of year-end 2020, active/open DB plans accounted for just 42% of DB plans tracked by the survey, down from 63% in 2010, while the number of frozen plans more than doubled to 43% of DB plans.
Still, there is nearly as much work to do when a DB plan is closed or frozen as when it is active, and ignoring the plan could come at great cost. A frozen DB plan still has a fixed set of promises based on when individuals will leave the company and start getting payments for life, so plan sponsors, using the help of providers, need to continue to manage the investments and make the required contributions. The following pages include listings for providers for cash balance and traditional DB plans and the services they offer. —Rebecca Moore