How to start a cash balance pension plan

It’s never too early to start saving for your retirement. One of the main benefits of a cash balance pension plan is that it’s far more accelerated than standard retirement plans and you can find yourself saving 20 years’ worth in 10 years or so.

By Craig Falck for Africa Report
Photograph: © Mrdoomits | Dreamstime.com

Investopedia’s definition of a cash balance pension plan reads as follows:

A cash balance pension plan is a pension plan under which an employer credits a participant’s account with a set percentage of his or her yearly compensation plus interest charges. A cash balance pension plan is a defined-benefit plan. As such, the plan’s funding limits, funding requirements and investment risk are based on defined-benefit requirements: as changes in the portfolio do not affect the final benefits to be received by the participant upon retirement or termination, the company solely bears all ownership of profits and losses in the portfolio.

The first step is finding a company or person that will be able to perform the managing role and set up the cash balance pension plan for you. They will require bits of information from you. As the company owner, that will allow them to plan exactly how much money can go into the plan without breaching rules and regulations. They will need information such as the company demographics, i.e. workers’ ages, races, LSMs, salary and wage structures. This will give them accurate information on which to base their calculations. While you may be competent to perform these calculations, it’s always a good idea to bring in a consultant – they deal with this industry and these products on a daily basis and are more up to date with new developments, so they’ll be best equipped to help you.

Once your consultant has performed his or her calculations, a legal document needs to be drawn up, outlining everything about the plan. This includes information about the contributions for the people involved in the plan, amounts paid and annual credit limit amounts. This is basically to ensure everyone involved can read it and have a clear picture of what is happening so that there are no surprises later.

Once your calculations have been done, documents approved and signed, it’s a simple task of making sure that the contributions are “paid” into the fund on time, as stipulated in the documents that have been drawn up. By complying with all the rules and regulations and meeting the objectives in the documents, you and your employees can find yourself far better off after adopting a cash balance pension plan than if you hadn’t. But call the experts – they’ll know best.

Source: www.investopedia.com