# How the assets are invested, and who bears the risk

> What investment results do to participants, to the owner's contributions, and to the plan at the finish line.

Source: https://askactuary.com/investments  
Author: Mike Rutkowski, FSA, EA, MSPA

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.

## The short version

- Participants are credited the plan's interest rate, whatever the actual return.
- Returns above the crediting rate lower future contributions. Returns below it raise them (as noted in [the contribution range](https://askactuary.com/contribution-range) the increase is generally about 10 cents on the dollar for asset losses).
- Too much growth near the 415(b) cap creates assets the plan can't pay out.
- Surplus that reverts to the employer faces income tax plus a 50% excise tax, or 20% in some cases.

## 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](https://askactuary.com/interest-credits) 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.

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Educational information only. Not tax, legal, or investment advice, and not an actuarial valuation.
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