A significant number of companies, particularly smaller ones, are turning to cash-balance retirement plans.
With interest rates so low because of the actions of the Federal Reserve and various economic pressures, Human Resource Executive Online notes that these plans have been performing better recently, at least in some cases. One senior retirement consultant at Towers Watson has seen about 5 or 6 percent annual improvement in account value for the past decade. While these plans led to some contention in the past, regulatory changes have been made which ease the process of crediting interest to cash-balance accounts.
Some firms may find that these plans are now a more useful retirement tool than in the past, which could be why they are being incorporated into a growing number of employee benefit plans. One expert told the news source that having a visible account balance could significantly impact how participants think about their retirement planning, causing them to focus.
At the same time, many people are already more aware of their household financial situation and retirement needs, particularly since the loss of savings and stability during the financial crisis. The employers who are pursuing cash-balance plans are generally those with fewer than 100 employees, according to HREO. Those businesses account for about 84 percent of cash-balance plans currently in place. Almost half are at firms with no more than 10 employees.
When compared to other types of retirement plans, cash-balance pensions plans only account for about 6 percent of the total, according to research by the Society for Human Resource Management. Most employers offer defined contribution plans, although significant numbers maintain defined benefit pensions or Roth-401(k)s.
The future of cash-balance plans
Regulatory changes have made cash-balance plans less risky. In particular, clarification of several matters affecting the plans came only in the last few years, ending one of the reasons many employers avoided them. Smaller companies have had more reason to go back to the plans since, as they seek a tax-deferred savings shelter.
Differences of scale mean that efficiency is more important to smaller firms, and cash-balance plans allow them to contribute more to retirement savings while reducing their taxable income. Further regulatory guidance is expected in the near future, which may affect how businesses look at these plans.
