The Next Evolution in Retirement - Market-Based Cash Balance Plans

Retirement planning has long been a cornerstone of employee benefits, yet the landscape is in a constant state of change. For decades, the conversation was dominated by traditional defined benefit pensions and, more recently, defined contribution plans like the 401(k). Each model presents its own set of advantages and challenges. Today, a hybrid solution is gaining prominence for its ability to combine the best features of both: the Market-Based Cash Balance Plan (MBCBP).

This article provides a comprehensive overview of Market-Based Cash Balance Plans, examining their structure, operational mechanics, and distinct advantages for employers and employees.

What is a market-based cash balance plan (MBCBP)?

A Market-Based Cash Balance Plan is a type of defined benefit retirement plan that shares characteristics with defined contribution plans. While technically classified as a defined benefit plan under the Employee Retirement Income Security Act (ERISA), it feels more like a 401(k) to the employee.

Here is how it works:

• Hypothetical accounts: Each participant has an individual account, similar to a 401(k). This account is "hypothetical" because the plan’s assets are pooled and managed professionally by an investment manager, just like a traditional pension.
• Contribution credits: The employer makes annual contributions to each employee's account. This is typically a percentage of the employee’s salary.
• Interest credits: The account is also credited with annual interest. In a Market-Based Cash Balance Plan, this interest credit is directly tied to the actual performance of the plan's underlying investments. This is the key differentiator from traditional cash balance plans, which use a fixed or variable interest rate.

The employee's benefit is the total value of their hypothetical account, which they can typically take as a lump-sum distribution or an annuity upon retirement or separation from the company.

How MBCBPs differ from traditional retirement plans

To fully appreciate the value of an MBCBP, it is useful to compare it to the more familiar retirement plan structures.

Traditional pension vs. MBCBP

Traditional defined benefit pensions promise a specific monthly payout to employees upon retirement, usually calculated with a formula based on salary and years of service. The employer bears all the investment risk, and the plan's assets are managed in a single pool.

• Benefit communication: Pensions communicate benefits as a future monthly payment, which can be difficult for younger employees to value. An MBCBP communicates the benefit as a current account balance, which is more tangible and easily understood.
• Investment risk: In a traditional pension, the employer is responsible for making up any investment shortfalls to fund the promised benefits. In an MBCBP, the interest credit is based on actual market returns, so the investment risk is effectively passed on to the participants, similar to a 401(k). This significantly reduces the employer's financial volatility and risk.
• Portability: Pensions are not portable. An MBCBP account balance is, allowing employees to roll it over into an IRA or another employer's plan when they leave the company.

401(k) vs. MBCBP

A 401(k) is a defined contribution plan where employees contribute a portion of their salary, and employers may offer a matching contribution. The employee is responsible for choosing their investments and bears all the investment risk.

• Contribution responsibility: In a 401(k), the primary funding comes from the employee. In an MBCBP, the employer makes the primary contributions, which can be a powerful tool for attracting and retaining talent.
• Investment management: 401(k) participants must manage their own investments, a task many find daunting. An MBCBP utilizes professional investment management for the entire pool of assets, relieving employees of this burden and providing access to institutional-level expertise.
• Contribution limits: MBCBPs, as defined benefit plans, allow for significantly higher tax-deductible contributions for the employer, especially for older, higher-compensated employees. This makes them a powerful tool for tax planning and accelerating retirement savings.

4 key advantages for employers

For plan sponsors, adopting a Market-Based Cash Balance Plan offers several strategic benefits that can enhance operational efficiency and talent management.

1. Reduced financial volatility

The most significant advantage is the mitigation of investment risk.

• Because the interest credited to participant accounts mirrors the actual investment returns, employers are not on the hook for funding gaps caused by market downturns.
• This eliminates the unexpected and often substantial cash contributions required to shore up underfunded traditional pension plans, leading to more predictable and stable costs.

2. Enhanced employee recruitment and retention

An MBCBP is a powerful differentiator in a competitive labor market.

• It offers a more robust retirement benefit than a 401(k) alone, signaling a greater employer commitment to employee financial wellness.
• The plan's clear, account-based structure is appealing to employees of all ages, and the professional management aspect is a valued perk.
• This can directly contribute to higher employee retention and an improved ability to attract top talent.

3. Significant tax advantages

As qualified retirement plans, employer contributions to an MBCBP are tax-deductible.

• The contribution limits for defined benefit plans are substantially higher than those for 401(k)s.
• This allows business owners and key executives to accelerate their own retirement savings while receiving a considerable tax deduction for the business.
• This is particularly valuable for professional service firms, such as law offices, medical practices, and consulting groups.

4. Simplified and transparent communication

Communicating the value of a traditional pension can be challenging.

• The concept of an "accrued benefit" payable in the distant future is often abstract.
• An MBCBP, with its simple account balance format, is far easier for employees to understand and appreciate.
• The regular statements showing contributions and investment returns make the benefit feel tangible and immediate.

4 key advantages for employees

Employees also stand to gain substantially from participating in a Market-Based Cash Balance Plan.

1. Professional investment management

Many employees lack the time, knowledge, or desire to manage their own retirement investments.

• An MBCBP removes this burden.
• The plan's assets are managed by financial professionals, providing participants with access to expertise and diversified investment strategies they might not be able to achieve on their own.

2. Higher employer contributions

MBCBPs are funded primarily by the employer.

• These contributions are often more generous than a typical 401(k) match.
• This employer-driven funding model helps employees build a more substantial retirement nest egg, regardless of their own ability to save.

3. Clear and portable benefits

The account-based nature of an MBCBP is a significant benefit.

• Employees can see their retirement savings grow in a clear, easy-to-understand format.
• The benefit is portable, so when an employee leaves the company, they can take their vested account balance with them, typically by rolling it over into an IRA or a new employer’s retirement plan.

4. Potential for higher returns

Unlike a traditional cash balance plan that credits a predetermined, often conservative, interest rate.

• An MBCBP allows employees to participate directly in the potential upside of the market.
• While this also includes exposure to downside risk, the long-term growth potential is generally higher, leading to a larger retirement account over time.

Considerations for market-based cash balance plans (MBCBPs)

• Navigating market volatility: While MBCBPs tie interest credits to market performance, employers can mitigate employee concerns by selecting diversified, professionally managed investment options. Over the long term, these plans still offer significant growth potential.
• Strategic plan design: Implementing an MBCBP requires thoughtful planning and collaboration with experts. However, this upfront effort ensures the plan is tailored to meet both organizational goals and employee needs, creating a win-win solution.
• Balancing administrative costs: While MBCBPs may involve higher administrative costs, these are often offset by the tax advantages and talent retention benefits they provide. Employers can work with experienced providers to streamline administration and maximize value.
• Employee education as an opportunity: Educating employees about the benefits and mechanics of MBCBPs is key to their success. This is an opportunity for employers to demonstrate their commitment to financial wellness, fostering trust and engagement.
• Ensuring regulatory compliance: Compliance with ERISA regulations is a necessary aspect of offering any defined benefit plan. Partnering with knowledgeable advisors ensures that the plan remains compliant while delivering its intended benefits.
• Equity in benefits: While MBCBPs allow for higher contributions for certain employees, employers can design the plan to include features that benefit a broad range of participants, ensuring it appeals to a diverse workforce.

Is a market-based cash balance plan the right choice?

An MBCBP is a compelling option for many organizations, but it is particularly well-suited for:

• Professional service firms looking to maximize tax deductions and retirement savings for partners and key employees.
• Companies with frozen defined benefit plans seeking a modern, less volatile alternative to offer employees.
• Organizations in competitive industries that want to offer a best-in-class benefits package to attract and retain premier talent.
• Employers who wish to combine it with a 401(k) plan to create a comprehensive, multi-tiered retirement savings program.

The future of retirement planning

Market-Based Cash Balance Plans represent a sophisticated evolution in retirement plan design. They successfully merge the most desirable features of traditional pension and 401(k) plans while mitigating their respective weaknesses.

For employers, they offer cost predictability, significant tax advantages, and a powerful tool for talent management. For employees, they provide professionally managed, employer-funded retirement accounts that are easy to understand and portable.

By aligning the interests of both plan sponsors and participants, MBCBPs provide a sustainable and effective framework for securing financial futures. As organizations continue to seek innovative ways to support their workforce, these plans are poised to become an increasingly integral part of the retirement benefits landscape.

Next steps for 401(k) sponsors

If you’re considering whether a Market-Based Cash Balance Plan is the right fit for your organization, start by evaluating your current plan’s performance, costs, and compliance status. Then, consult with a qualified Risk Strategies Retirement Plan Services Provider to discuss how a MBCBP could align with your goals and workforce needs.

Risk Strategies Retirement Plan Services specializes in delivering tailored corporate retirement plan solutions that help businesses reduce fiduciary risk, streamline plan administration, and enhance employee retirement outcomes.

Whether you're a small business looking for your first plan or a growing company seeking a more cost-effective and compliant strategy, our team brings deep expertise, transparent pricing, and hands-on support every step of the way.

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