Investments
How the assets are invested, and who bears the risk
In a 401(k), each participant lives with their own investment results. In a Cash Balance plan, participants are promised their account balance, and the employer absorbs the difference between that promise and what the assets earn.
One trust, invested together
Contributions go into a single plan trust. The trustee, usually the owner or a trusted advisor, sets an investment policy and chooses the investments. Participants don't direct their own accounts.
What returns do to each party
| Assets earn | Participants | Owner and business |
|---|---|---|
| Same as the crediting rate | Accounts grow at the crediting rate | Contributions track the pay credits |
| More than the crediting rate | No change: accounts still grow at the crediting rate | Future minimums fall. A surplus can build up |
| Less than the crediting rate | No change, the promise still holds | Future minimums rise to make up the shortfall over time |
With an actual-return crediting rate, participant accounts move with the assets, and most of this risk passes to participants. See Interest crediting rates for the reasons that we still recommend a flat interest crediting rate.
Why plans invest conservatively
Owners often expect to invest a Cash Balance plan like their personal portfolio. The plan's structure argues against that:
- The upside is capped. The owner's benefit can't exceed the 415(b) limit, so gains beyond the crediting rate mostly reduce future deductible contributions.
- The downside isn't. Losses come back as higher required contributions.
- The finish line matters. Assets above the cap when the plan ends are a problem rather than a bonus.
A common approach is a mix designed to earn close to the crediting rate with modest volatility. However, the client works with their financial advisor to set this policy, the actuary never gives investment advice.
When the plan ends with too much
If assets exceed what the plan owes at termination, the options include:
- Raising benefits for participants who are still under their 415(b) limits, by amendment.
- Transferring at least 25% of the surplus to a qualified replacement plan (QRP), such as a 401(k) profit sharing plan. The QRP allocates the excess annually to participants as employer contributions, for up to 7 years. The excise tax on the remaining reversion (if any) drops from 50% to 20%.
- Taking a reversion to the employer, which is taxed as income and hit with a 50% excise tax (unless reduced to 20% as noted above).
When the plan ends with too little
If assets fall short, the employer can either contribute the difference before closing the plan OR a majority owner can waive part of their own benefit so the plan can close without a final contribution. Because of this, having too few assets at termination (compared to the cash balance account total) is generally not an issue.