“BEYOND THE 401(k)”The Cash Balance Plan

Presented by: Brad Wexler, QKA, QPA, QPFCTycor Benefit Administrators, Inc.

November/December, 2015 (610) 251-0670bwexler@tycorbenefit.com

*Securities and Investment Advisory Services offered through NFP Advisor Services, LLC (NFPAS), member FINRA/SIPC. NFPAS is not affiliated with Tycor Benefit Administrators, Inc. NFPAS does not provide tax or legal advice.

AGENDA

• 2015 Research Report: Highlights and Trends• What’s Behind Record-Setting Growth?• Cash Balance + Small Business: A Love Story• Successful Companies with Cash Balance Plans• What’s New: IRS Regulations and More

BEST OF BOTH WORLDS

• 401(k) Profit Sharing-Flexibility, Portability, Simplicity

• Traditional Defined Benefit- High Contributions, Limits: $2.6M, Lifetime Benefit

• Cash Balance- Hybrid of the above

2015 CASH BALANCE CONTRIBUTION LIMITS

Age Cash Balance65 $237,000 64 $243,000 63 $248,000 62 $254,000 61 $241,000 60 $228,000 59 $216,000 58 $205,000 57 $194,000 56 $184,000 55 $175,000 54 $165,000 53 $157,000 52 $149,000 51 $141,000 50 $133,000 49 $126,000 48 $120,000 47 $114,000 46 $108,000 45 $102,000

Source: http://www.cashbalancedesign.com/calculators/chart_limits.html

CASH BALANCE OVERVIEW

• Traditional Defined Benefit plans are becoming less popular

• Careful- Cash Balance Plans are NOT profit sharing plans

• Contributions are not discretionary-required annual funding obligation

• Usually involves a 401(k) plan-However, no longer discretionary-must make minimum contributions

• Cannot use last-day/hour of service requirement to receive contribution.

Cash Balance Basics

• A Defined Benefit Plan • Has features that resemble a 401(k) Plan• Participants have hypothetical account balances• Account increases by employer contribution and

guaranteed interest rate (2.83% in 2015)*

• Not dependent on plan’s investment performance

*30-Year Treasury Bond Rate – 12/14

Cash Balance Considerations

• Plan sponsor assumes investment risk

• Contributions are normally required every year

• Plan provides monthly benefits (or other options, i.e. lump sum) at retirement that are equivalent to the hypothetical account balance

Key Features

• Combines maximum benefit under a Defined Benefit Plan with some flexibility/portability of 401(k)/profit sharing plan

• Individual Hypothetical Account Balance for participant

• Funded entirely by employer contributions• Interest rate guaranteed• Trustee-directed pooled investment account• Benefits are portable

2015 RESEARCH REPORT(Highlights and Trends)*

• From 2006 (3,893 plans) to 2014 (14,629)- Increase of 375%

• Growth Rate Soars Past 401(k) Plans in 2014- Cash Balance-32%, 401(k)-3%

• Cash Balance Plans now make up over 28% of all defined benefit plans (up from 2.9% in 2006)

• Small/mid-size businesses continue to drive CB growth (89% of plans have less than 100 employees

• Average Company Contribution to Employee in a 401(k) Plan- 3.0%. To an Employee in a 401(k) combined with a Cash Balance Plan- 6.3%

*IRS Form 5500 Filings 2006-2014, 2015 National Cash Balance Research Report

WHAT’S BEHIND THE GROWTH?

• Taxes- From 2012- 2015, highest income tax went from 35% to 39.6%.

• Retirement Savings Crisis- Retiring Boomers find 401(k) Plans fall Short

• Longevity Challenges- need 25-30 years of retirement income

• Many Boomers are under-prepared• Social Security Issues, and the decline of traditional

pensions• Market losses/volatility• Rising retiree healthcare costs

WHAT’S BEHIND THE GROWTH

• Public awareness/Newspapers/Social Media

• Fastest Way to “Catch Up”

• Therefore “A Perfect Storm”- Rising Taxes, Retirement Savings Crisis, Media Coverage, Legislative Changes

CASH BALANCE+SMALL BUSINESS:A Love Story

• Cash Balance plan growth driven by small businesses• 89% have less than 100 Employees*

• Cost/Tax Efficiency- Ratio of owner/employee contributions works very well for small firms

• Age-weighted contribution limits-Ideal for older owners who have sunk most assets into the business and are behind on retirement

• Asset Protection (for lawsuit or bankruptcy• Attracting/retaining key employees (CB plans have greater

appeal)• Succession planning for family businesses

*IRS Form 5500 Filings 2014

SUCCESSFUL COMPANIES WITH CASH BALANCE PLANS

• Business owners with income greater than $265K and consistent profits

• Wealthy boomers who need to squeeze 20 years of retirement saving into 10 years

• Businesses with a 401(k)/Comparability plan• Professional services firms-medical groups,

CPA’s, law firms and financial services• Successful family businesses and closely held

businesses

Cash Balance Plans by Business Type

• Doctors-26%• Dentists-12%• Attorneys-8%• Accountants-8%• Manufacturing-8%• Engineers-6%• Health Care-6%

WHO TO AVOID

• Unpredictable profit patterns

• Won’t give 6%+ of pay to employee retirement accounts

• Challenging demographics

WHAT’S NEW: IRS REGULATIONS AND MORE

• Regulations Issued in 2010- Greater Flexibility and Simplicity, Many funding issues minimized, Increased awareness

• Regulations Issued in 2014-IRS finalizes Cash Balance regulations, Allows multiple investment options within a single CB Plan

• Allows for broader option for choosing Interest Crediting Rate (ICR)

INTEREST CREDITING RATE (ICR)

• Hypothetical account balance is the sum of pay credit and interest credit that are added to the beginning hypothetical account balance each year (both must be defined in the plan document)

• Pay Credit=% of compensation (or flat dollar amount) that each participant will receive after 1000 hrs.

• Interest crediting rate= 30-year Treasury bond rate, Fixed Rate up to 6%, Investment Based Rates (diversified mutual fund), or Actual return of Plan Assets (portfolio must be diversified)

FUNDING THE PLAN

• Most important aspect of Cash Balance Plans• Actual returns should cover the interest

crediting rate• Hypothetical account balances are independent

of actual investment results• Normal goal is assets should equal 100-110% of

hypothetical account balances• Only two sources of money-1)Employer

Contributions; 2)actual investment earnings.

FUNDING THE PLAN

• If assets are less then 100% of hypothetical account balances-future contributions may increase, distributions could be restricted

• If assets grow in excess of hypothetical account balances-future contributions and deductions may be reduced

WHAT’S AHEAD

• Market absorbing the impact of 2014 regulations• Continuing small business confidence• 2016 Election Year- no chance of tax reform

impacting qualified plans• Market volatility-increases the appeal for Cash

Balance Plans• Guaranteed Retirement Income Issue- annuity

options and the “safe money” aspect of Cash Balance Plans=increasing popularity

WHAT’S AHEAD

• Continued strong CB growth driven by tax climate, economy and awareness

• CB becomes a “must-have” for top medical/legal groups

• Cash Balance market still very new, like the early days of 401(k). Therefore, will be more opportunities and trends in the future.

Where to Go From Here

• 2015 may be a great opportunity to get a jump start on saving for your retirement and reducing your taxes.

• Any plan established by 12/31/2015 can retroactively be effective 1/1/2015.

• Retirement will not happen without proper planning.

• Tycor can plan and do a complimentary analysis for you (See Handout)

Questions

When considering a cash balance plan, you should take into account your retirement expectations, when you intend to begin receiving your benefits, and the chance that your needs might change.

In analyzing any choice presented under your plan, you will want to compare all the terms and options available to you under the cash balance package with those currently available to you. It is important for you to consider each option under each plan formula.

You will also want to consider the specifics of your retirement benefit, such as how your accrued benefit (including the value of any early retirement subsidy) is defined under each formula, the current value of your accrued benefit under each formula, and its value as an annuity at normal retirement age, or as a lump sum distribution. You may also want to take into account how your choice will affect survivor benefits.

You should also compare the value of other related benefits that may be offered under either choice. For instance, some traditional pension plans provide for an offset or subsidy if you retire prior to the age at which your Social Security benefits commence, or offer credit for service also covered by a disability benefit plan.

In making your decision, you should pay attention to any time limits that may apply and any waivers you may be requested to sign. Finally, you need to consider how long you have been with your employer and whether or not you expect to stay employed with your current employer or change jobs in the future.

Tycor does not provide legal or tax advice. Any decisions whether to implement these ideas should be made by the client in consultation with professional financial, tax and legal counsel.

Asset protection plans should be developed and implemented well before problems arise. Due to the fraudulent transfer laws, asset transfers that occur close in proximity to the filing of a lawsuit or bankruptcy can be interpreted by the court as a fraudulent transfer. Proper structuring of these assets is imperative please seek proper legal and tax advice prior to engaging in re-titling/structuring of any assets. Please note that laws are subject to change and can have an impact on your asset protection strategy.

Considerations

• 850 Cassatt Road, Suite 310 Berwyn, PA 19312 610.251.0670

• For More InformationCall

• [Brad Wexler]• 610.251.0670

• [bwexler@tycorbenefit.com]

•Tycor Benefit Administrators, Inc.®

• Confidence in your plan ™

• Securities and Investment Advisory Services offered through NFP Advisor Services, LLC (NFPAS), member FINRA/SIPC. NFPAS is not affiliated with Tycor Benefit Administrators, Inc. NFPAS does not provide tax or legal advice.