The Fastest Growing Retirement Plan You Never Heard Of

Does a small business owner who has failed to save enough for retirement but who is averse to portfolio fluctuations describe anyone you know?

If so, a retirement plan you've probably never heard of offers a solution you might at least want to investigate.

Lo and behold, so-called "cash-balance plans," seemingly out of nowhere, have surged in popularity, growing 22% vs. 1% for the quotidian 401(k) plans advisors work with.

That is according to the 2014 National Cash Balance Research Report, based on 2012 — the most recent year for which the IRS has complete data.

The reason advisors might be unfamiliar with the retirement option, despite an impressive level of growth occurring amid a languid economy, is the low base it comes off. By the end of 2012, there were fewer than 10,000 plans, compared with over half a million 401(k) plans.

Yet in terms of assets, the cash-balance plans are rapidly catching up, nearing $1 trillion ($859 billion in 2012), compared to about $4 trillion for 401(k)s.

How could such a small number of plans achieve such high assets?

Well, it probably helps some of those plans are sponsored by ginormous companies like IBM, AT&T and Boeing, with $54.9 billion, $45.2 billion and $28.1 billion in assets, respectively.

The list of large and familiar names is actually quite long, including not only blue chip corporations but white-shoe law firms (such as Sidley Austin and Skadden Arps) and well-known hospitals (like Sutter Health and Massachusetts General Hospital).

And while these firms give cash-balance plans their bulk, the report prepared by Kravitz, which designs and administers retirement plans, including more than 500 cash-balance plans, finds that the overwhelming majority of these plans — 87% — are in companies with fewer than 100 employees.

So what's the appeal?

For large corporations like IBM, recharacterizing traditional defined benefit plans as cash-balance plans has enabled them to limit their pension liabilities. Because employees earn a fixed rate of return, companies need not constantly recalculate their liability based on fluctuating equity performance.

But for the small-business owners, often older individuals anxious about not having saved enough for retirement, age-weighted contribution rules allow one to squeeze 20 years of savings into 10.

Another key attraction, according to the report, is that employees need not reduce their take-home pay to receive employer contributions, which are not based on a "match," as is the case in 401(k) plans.

Indeed, just about half of the over 12 million cash balance plan participants work in businesses of fewer than 10 employees, a common target of retail financial advisors.

The business owner appreciates the write-off and the ability to catch up on his own retirement savings, and that latter motivation can accrue to the benefit of workers who consequently receive well over double the average employer contribution. According to the report, the companies sponsoring 401(k) plans contribute 2.6% of pay on average, but companies offering both types of plans (96% of all companies offering cash-balance plans also offer the choice of a defined contribution plan) contribute 6.3% of pay on average.

Employees wary of fluctuating returns may also take comfort in their plan's conservative, fixed return investments — like an ordinary bank savings account, which, upon retirement, they can annuitize or take as a lump sum.

Plan assets are invested according to a rate written into a contract that can be based on a 30-year Treasury bond, some other fixed rate, a bond rate with a floor or actual earned returns — all conservative options.

Doctors' offices lead the pack in offering the plans; they account for 26% of plans, followed by dentists' offices, with 12%. Financial advisory organizations make up 8% of the total.

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