Cash Balance Plan Product Seeks Flexibility

Kravitz has launched a new product that “can offer diverse investment options within a single cash balance plan.”

Traditional cash balance plans are pooled and invested collectively to meet a single targeted interest crediting rate (ICR), explains Dan Kravitz, president of the retirement plan administration firm Kravitz, but recent regulatory changes allow for a new approach. Kravitz says the Internal Revenue Service’s (IRS) approval of “actual rate of return” interest crediting rates for cash balance plans “gave plan sponsors greater flexibility and removed some funding challenges.”

Taking advantage of the regulatory changes, the new Kravitz plan design “allows participants to be grouped into different strategies designed to meet diverse goals and risk tolerances.”

“This new cash balance approach is extremely compelling for our larger medical groups and law firm clients,” Kravitz notes. “When you have hundreds of participants with diverging retirement goals and very different lengths of service, you really want to be able to provide more options.”

One Kravitz client, a large law firm, adopted the new design and has cash balance plan assets grouped into three pools. These include a moderate strategy suitable for shorter service participants and those with higher risk tolerance; a conservative strategy for mid-career participants and those with lower risk tolerance; and an ultra-conservative strategy, for longer service employees and retirees.

All three strategies follow the regulatory guidelines governing market rates of return and risk, and are managed with close attention to IRS compliance testing and preservation of capital rules, according to the firm.

“The option to allow participant direction in cash balance plans is still under study by the IRS, so plan sponsors decide how to group participants,” Kravitz notes. “Even so, the capacity to include multiple strategies within a single plan makes cash balance an even more compelling option for many employers.”

To help educate plan sponsors and clarify the complex issues involved in choosing an appropriate interest crediting rate strategy, Kravitz has published an ICR Guide. More information is also at http://cashbalancedesign.com/.