Notes. Cash Balance Outlook Agenda. Cash Balance Overview

Transcription

1 Cash Balance Outlook 2013 July 9, 2013 Dan Kravitz, President, Kravitz Inc. Martha Ophir, Marketing Manager 1 Agenda Cash Balance Research Report Highlights 2. What s Driving Growth? 3. Both Sides of the Story: Small vs. Large Plans 4. Taking Advantage of Key Growth Trends 5. What s Ahead? Tax Reform Proposals & Beyond 2 Cash Balance Overview Defined Contribution Cash Balance Defined Benefit 401(k) Profit Sharing Hybrid Traditional 3 1

2 Best of Both Worlds Flexibility, Portability, Simplicity Cash Balance High Contribution Limits: $2.6 M Lifetime Benefit 401(k) Profit Sharing Hybrid Traditional 4 6 th Annual Kravitz Research Report Data analysis using: IRS Form 5500 filings, DOL - EBSA data PSCA Annual Survey Growth Rate Soars Past 401(k) Plans Cash Balance: 401(k): 12% -3% 6 2

3 Cash Balance Growth: Actual CB Growth is Higher! Almost 1200 new CB plans sold in 2011 but chart shows net growth under 1,000: why? Plan terminations make up the difference Average lifespan of a small plan: 7-10 years 8 Economy Not Slowing CB Growth : Recession, Stalled Economic Growth 36% Increase in new Cash Balance Plans 19% Increase in CB Assets 9 3

4 The Cash Balance Billboard Chart 10 Why Is CB More Popular in Certain States? Medical hubs : concentration of major medical schools, research centers, hospitals, e.g. Boston, San Francisco, New York, Dallas Higher tax environments especially NY, CA Demographics: population & age e.g. Florida Presence of CB Champions (advisory groups, TPA firms) 11 Top 7 States that Tax You the Hardest 3.Oregon 9.9% 4.Iowa 8.98% 7.New York 8.82% 1.California 13.3% 2.Hawaii 11.0% 5. Vermont & D.C. 8.95% 6.New Jersey 8.97% 12 4

5 Decline of Traditional DB Continues Cash Balance as a % of all DB Plans 13 What s Driving Cash Balance Growth? 14 Growth Driver #1: Tax Environment 2012 Rates 2013 Rates Investment tax* = 0% Investment tax* = 3.8% Highest income tax = 35% Highest income tax = 39.6% Medicare tax** = 2.9% Surtax of.90% = 3.8% Capital gains/dividend tax = 15% Capital gains/dividend tax =23.8% * Investment Income tax on all unearned income (interest, dividends, gains, rents & royalties, etc.) ** Medicare tax for individuals is 1.45%. Most company structures require an Employer matching amount of 1.45%. Most of these taxes applied on high wage earners earning >$250k, AGI, filing jointly. 15 5

6 Understanding Tax Deductions Above The Line Deductions Most desirable type of deduction - Reduces AGI Cash Balance and other Qualified Retirement Plan Contributions Below the Line Deductions Many limitations - Subject to phaseouts.* Charitable Contributions State Tax Property Taxes Mortgage Interest *Subject to phase outs based on income > $250,000 (Single) or >$300,000(Married filing jointly) 16 Summary of CB Tax Advantages Advisor Handout Client Handout 17 Growth Driver #2: Retirement Savings Crisis 18 6

7 Retirement Savings Crisis Longevity challenges: need years of retirement income Many wealthy Boomers under-prepared Social Security viability issues, decline of traditional pensions Market losses and volatility Rising retiree healthcare costs 19 Fastest Way to Catch up Cash Balance lifetime limit: $2,600, Growth Driver #3: Awareness! No longer a well kept industry secret: 21 7

8 Summary: A Perfect Storm Rising Taxes Retirement Savings Crisis Public Awareness, Media Coverage Legislative Changes 22 Both Sides of the Story CB growth: driven by small business but also a popular choice for certain large firms and some Fortune 500 companies % Have <100 Employees 24 8

9 Why So Appealing to Small Business? 1. Cost efficiency and tax efficiency: ratio of owner/employee contributions works very well for small to mid-size firms 2. Age-weighted contribution limits: ideal for older owners who have sunk most assets into the business and are behind on retirement 3. Asset protection (for lawsuit or bankruptcy) 4. Attracting and retaining key employees (CB plans have greater appeal) 5. Succession planning for family businesses 25 Large Plans: Top 10 by Asset Size 26 What s the Appeal for Large Firms? 1. Enhanced corporate retirement packages: a pension without all the hassles of a traditional DB plan 2. Recruitment advantage (in particular for large medical and law firms) 3. Flexible options for large multi-partner firms 4. Conversions from traditional DB plans make sense for some Fortune 500 companies 5. Asset protection (bankruptcy, lawsuits) 6. Keeping up with competitors (e.g. AmLaw 100 majority have a CB plan) 27 9

10 Taking Advantage of CB Growth You have the basic knowledge, now what? Here are 5 tips to get started 28 #1: Focus on the Right Targets NOT a mass market product like a 401(k): Cash Balance is a niche product 29 Who is Ideal? 1. Business owners with income >$250,000 and consistent profit patterns 2. Wealthy boomers who need to squeeze 20 years of retirement savings into 10 years 3. Businesses with a New Comparability plan 4. Professional services firms, including medical groups, CPAs, law firms and financial services 5. Successful family businesses and closely held businesses 30 10

11 Who to avoid: 1. Companies with unpredictable profit patterns 2. Owners unable or unwilling to put at least 5% of pay into employee retirement accounts 3. Multi-partner firms with a lot of internal discord (need a partnership agreement) 4. Companies with challenging demographics (e.g. very young owners with older employees) 31 Growth in Diverse Business Sectors Cash Balance Plans by Business Type 32 #2: Understand Plan Combinations 33 11

12 Recent Misunderstanding CB is NOT the next 401(k) and will never replace the 401(k)! CB works hand-in-hand with 401(k): perfect marriage! 34 #3: Reach Out to Tax Advisors & CPAs Many CPAs are unaware of Cash Balance Plans and are thrilled to find a major new deduction/deferral option for clients. 35 #4: Sell the Safe Money Story Market volatility increases the appeal of CB Plans [Market fluctuation slide] 36 12

13 #5: Partner with a CB Specialist Cash Balance Plans are highly technical and sophisticated Lack of experience can lead to failed IRS testing, lower benefits, missed opportunities Complex sale need a partner who can help 37 What s Ahead? Key factors impacting the Cash Balance market in 2013: Tax reform and deficit reduction proposals targeting retirement plan deferrals the fight in DC continues Awaiting guidance on New Cash Balance regulations, ICR issues in particular Impact of the Affordable Care Act implementation Economy & market volatility 38 Retirement is a Hot Button Issue All tax-deferred retirement plans under scrutiny Baucus & Camp blank slate proposal Must justify keeping each tax break Deferral is not a tax expenditure Lobbying to protect/educate ASPPA, savemy401k.com Retirement security issues: push for Lifetime Income options, guaranteed retirement income 39 13

14 Good News for Cash Balance? Lower 401(k) limit would increase demand for Cash Balance plans Congressional focus on weaknesses of the 401(k) system draws attention to the role of Cash Balance and hybrid options 40 Guaranteed Retirement Income Issue Annuity options and the safe money aspect of Cash Balance plans = greater political interest 41 Healthcare Reform and Physician Savings Uncertainty over impact on physician income Tax and income concerns = greater push for tax-deferred retirement savings Medical groups still adopting CB plans at much higher rates than all other businesses 42 14

15 New CB Rules: October 19, 2010 IRS Final Regulations Effective immediately Newly Proposed Regulations Effective January 1, 2012 Industry responded with extensive input and questions, now waiting for clarification. 43 New Cash Balance Rules Net positive for Cash Balance Plan sponsors Greater flexibility and simplicity Clarification of market rate of return Currently waiting for IRS response to industry input, but all signs indicate strong IRS support for CB 44 Impact on Cash Balance Growth IRS thumbs up for Cash Balance Plans More ICR options Some funding issues minimized Higher awareness of Cash Balance plans

16 CB Interest Crediting Rates Chosen 46 Cash Balance 2013 Predictions 1. Continued strong CB growth driven by political/economic currents and tax climate 2. Alternative ICRs become more popular, pending IRS guidance 3. CB as a competitive recruiting strategy for professional services 4. Competition & commodification: more players, more CB product offerings and innovations 47 Coming Soon? Multiple ICRs Within a Plan Participant Direction Target Date Funds Not yet available but under IRS consideration Greater interest in Cash Balance investment issues as CB assets approach $1 trillion nationally 48 16

17 Cash Balance Innovation Cash Balance market still very new, like the early days of 401(k). Opportunities and trends will include: Software innovations for plan design and actuarial work Participant technology, participant communications Investment and guaranteed income products 49 Daily Valuation & Participant Technology Taking Cash Balance out of the black box Participant-friendly technology 24/7 mobile access 50 Web-based CB Solutions for TPAs 51 17

18 How Can We Help? Learn more about opportunities to grow your business with Cash Balance Plans: (877) CB-Plans Cash Balance Consultants 52 Beyond the 401(k) Order at Amazon.com Free chapter at CashBalanceBook.com 53 Cash Balance Coach Certification 18

19 55 Thank You 56 19