Why Cash Balance Plans Need Regular Benchmarking Every Few Years
- Legacy Strong
- Mar 31
- 4 min read
Cash balance plans are a powerhouse for business owners and high-earning professionals, combining hefty contribution limits with substantial tax advantages. These hybrid defined benefit plans promise participants a predictable account balance through employer contributions and guaranteed interest credits, merging pension-like security with 401(k)-style flexibility. Yet, to keep them firing on all cylinders, a regular benchmark—every three to five years—is essential. It ensures the plan stays cost-effective, compliant, and aligned with wealth-building goals, while unlocking advanced tax strategies like life insurance integration. Here’s why benchmarking matters and how it elevates your cash balance plan.
1. Ensuring Competitive Investment Performance
Cash balance plans pool contributions into a single fund, tasked with meeting interest credits—often 4-5% or linked to Treasury rates. Market shifts, like 2021’s equity surge or 2025’s rate-driven volatility, can skew returns. Benchmarking every few years compares your fund’s performance to peers or indices (e.g., a 60/40 stock-bond mix). If returns dip below the credit rate, you’ll need extra funding; if they soar, you might overfund unnecessarily. Regular checks—say, every three years—keep investments optimized, safeguarding participant benefits and your cash flow.
2. Integrating Life Insurance for Tax Planning
Cash balance plans can pair with life insurance to amplify tax benefits and legacy planning, and benchmarking keeps this strategy sharp. Within the plan, you can use pooled assets to buy permanent life insurance (e.g., whole or universal life) for key participants—often the owner. How it works:
Tax-Deferred Growth: Premiums are paid with pre-tax plan dollars, and the policy’s cash value grows tax-free inside the plan.
Deductible Expense: Premium costs reduce your taxable income, just like contributions. A 50-year-old owner adding $50,000 in premiums to a $200,000 contribution cuts taxable income by $250,000—saving $92,500 in a 37% bracket.
Death Benefit Leverage: At death, the policy pays a tax-free benefit to heirs, often exceeding contributions. A $50,000 annual premium might yield a $1 million payout, sidestepping estate taxes if structured right.
Access Flexibility: Borrow against the cash value tax-free during your lifetime, then repay it to keep the policy intact.
Benchmarking every few years ensures this fits your goals—reviewing cash value growth, premium costs, and death benefit adequacy. A 2025 check might tweak coverage as rates rise or swap insurers for better terms, maximizing tax savings and wealth transfer.
3. Controlling Costs and Fees
Fees—administrative, actuarial, investment—can erode efficiency. A $2,000 annual cost in 2020 might hit $5,000 by 2025 as assets grow or providers add charges. Benchmarking exposes these trends, stacking your fees against similar plans. Paying 1% when peers average 0.5%? That’s $10,000 lost yearly on a $2 million plan. Routine reviews trim excess, ensuring more dollars fund benefits—or strategic add-ons like life insurance—rather than middlemen.
4. Adapting to Regulatory Changes
Retirement plan rules evolve—think SECURE Act (2019) or SECURE 2.0 (2022) updates to funding, testing, and disclosures. Benchmarking every few years confirms compliance with IRS and DOL shifts, like new mortality tables or the 2025 $3.8 million benefit cap. Miss a change—like an outdated interest credit—and you risk penalties or lost tax deductions. A 2025 review might flag a non-compliant rate, letting you adjust before trouble hits.
5. Aligning with Business and Participant Goals
Your business isn’t static—neither should your plan be. A 2020 design for a 45-year-old owner contributing $200,000 might underperform at 50, when 2025 limits allow $275,000. Benchmarking realigns contributions and benefits as profits, staff, or retirement timelines shift. Adding employees? Adjust their credits (e.g., 5% to 7.5% of pay) to pass nondiscrimination tests while maximizing your share. It keeps the plan a wealth-building engine, not a dated burden.
6. Managing Funding Stability
Cash balance plans mandate funding promised benefits, and market swings—like 2022’s 20% S&P drop—can disrupt ratios. If investments lag the interest credit, you’ll owe more; if they overshoot, you might lock in surplus. Benchmarking every three to five years assesses funding health against actuarial assumptions (e.g., 5% return). It prevents surprises—like a $100,000 shortfall—while identifying room for tax-smart moves like insurance.
7. Enhancing Participant Confidence
Participants expect their balances to grow as promised. A stagnant plan undermines trust, especially if peers offer better. Benchmarking signals diligence—monitoring returns, costs, and compliance. A 2025 review might bump a 4% credit to 5% to match market norms, shared via statements. It reassures employees and owners alike, strengthening retention and morale.
Real-World Impact
Picture a law firm with a $2.5 million cash balance plan from 2020. By 2025, returns dip to 4% (below the 5% credit), and fees hit 1.2% versus a 0.8% norm. A benchmark boosts returns to 5.5% with a new fund mix, cuts fees to save $10,000 yearly, and optimizes a $40,000 life insurance policy for the owner. That policy slashes their taxable income by an extra $14,800 annually and builds a $900,000 death benefit—all while keeping employee benefits solid. Without the review, costs and inefficiencies would’ve snowballed.
Why It’s Worth It
Cash balance plans turbocharge wealth—$150,000-$350,000 annual contributions dwarf 401(k) limits—and life insurance adds tax and legacy firepower. But without benchmarking, you’re flying blind. A review every few years prevents overfunding, ensures compliance, and optimizes extras like insurance, saving far more in taxes and lost growth. For business owners, it’s about maximizing a stellar tool.
Take Action
If your plan’s unchecked since 2020, schedule a benchmark. Contact your administrator or a specialist like Legacy Strong to audit returns, fees, compliance—and fine-tune life insurance integration. A few hours could save thousands and lock in decades of tax-smart wealth. Keep your cash balance plan—and your future—rock solid.
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