Notes. Cash Balance Outlook Agenda. Cash Balance Overview

Transcription

1 Cash Balance Outlook 2012 August 9, 2012 Dan Kravitz, President, Kravitz Inc. Martha Ophir, Marketing Manager 1 Agenda Cash Balance Research Report Highlights 2. What s Driving Growth? 3. Cash Balance and Small Businesses 4. Taking Advantage of Growth Trends 5. What s Ahead? Impact of the Election, Healthcare Reform, New IRS Regulations and 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: $2.5M lifetime benefit 401(k) Profit Sharing Hybrid Traditional 4 Cash Balance Accounts Participants have accounts Accounts grow in 2 ways: 1. Employer Contribution 2. Interest Crediting Rate (ICR) Accounts are portable 5 5 th Annual Kravitz Research Report Data analysis using: IRS Form 5500 filings, DOL - EBSA data PSCA Annual Survey 6 2

3 CB Growth Exceeded Projections! 7 Growth Rate Almost Doubled in 2010 Cash Balance: 401(k): 21% -1% Compared with 11% growth in Cash Balance Growth: *Projection based on current growth rates and industry trends 9 3

4 Recession Not Slowing CB Growth : Market Crash, Recession, Stalled Recovery 38% Increase in new Cash Balance Plans 18% Increase in CB Assets 10 Regional Growth Trends 11 Decline of Traditional DB Continues Cash Balance as a % of all DB Plans 12 4

5 Why the Decline? Interest rate risk issues (worsening in today s lowinterest environment) Volatile costs Difficult for participants to understand Uneven contributions to employees Portability issues Funding issues 13 What s Driving Cash Balance Growth? 14 Growth Driver #1: PPA 2006 Official IRS approved Added clarity & simplified administration 15 5

6 Impact of 2006 PPA 16 Growth Driver #2: Retirement Savings Crisis 17 Retirement Savings Crisis Longevity challenges traditional models Decline of traditional income sources (Social Security, pensions) Market losses and volatility Rapidly rising retiree healthcare costs 18 6

7 Impact of Longevity In 1950, retirement lasted last about 3.5 years Retirees today need to fund years of retirement Cash Balance advantage: age-weighted limits, double or triple pre-tax retirement savings 19 Probability of living to Fastest Way to Catch up 2012 Contribution Limits 401(k) Profit Sharing & Cash Balance Plans 401(k) with Tax Age Profit Sharing Cash Balance TOTAL savings* $55,500 $203,000 $258,500 $103, $55,500 $164,000 $219,500 $87, $55,500 $125,000 $180,500 $72, $50,000 $96,000 $146,000 $58, $50,000 $73,000 $123,000 $49, $50,000 $56,000 $106,000 $42, $50,000 $43,000 $93,000 $37,200 Cash Balance lifetime limit: $2,500,000 *Assuming 40% tax bracket, taxes are deferred 21 7

8 Growth Driver #3: Tax Anxiety 22 State Taxes (heading even higher?) 23 Growth Driver #4: Awareness! No longer a well kept industry secret: 24 8

9 Dominating the News Many state and local governments are implementing or studying Cash Balance and hybrid pension options There is, however, another long-term reform option for California Known as a cash balance pension, a hybrid that combines the best aspects of defined-benefit or pensionstyle plans and defined-contribution plans such as 401(k)s. 25 CB Proposals on the table in many states 26 Summary: A Perfect Storm Tax Climate Retirement Savings Gap Public Awareness, Media Coverage Legislative Changes 27 9

10 Cash Balance & Small Business 28 84% Have <100 Employees 29 Why So Appealing to Small Business? 1. Cost efficiency and tax efficiency: balance of owner/employee contributions works very well for small to mid-size firms 2. Age-weighted contribution limits: ideal for owners who have sunk most assets into the business and are behind on retirement 3. Asset protection (in the case of lawsuit or bankruptcy) 4. Attracting and retaining key employees (DB plans have greater appeal) 5. Succession planning for family businesses 30 10

11 Taking Advantage of CB Growth You have the basic knowledge, now what? Here are 5 tips to get started 31 #1: Look for Ideal Candidates: Cash Balance is not a fit for everyone 32 Who is Ideal? 1. Business owners with income >$250,000 and consistent profit patterns 2. Boomers who need to squeeze 20 years of retirement into the next 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 33 11

12 Growth in Diverse Business Sectors Cash Balance Plans by Business Type 34 #2: Understand Plan Combinations 35 #3: Reach Out to Tax Advisors & CPAs Most CPAs are unaware of Cash Balance Plans and are thrilled to find a major new deduction/deferral option for clients

13 #4: Sell the Safe Money Story Market volatility increases the appeal of CB Plans [Market fluctuation slide] 37 #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 38 What s Ahead? Key factors impacting Cash Balance market in 2012 and 2013: Election in November Deficit reduction proposals New Cash Balance regulations Healthcare reform Economy & market volatility 39 13

14 Retirement is a Hot Button Issue Because not everyone has a Romney-sized IRA 40 Election Issues and Concerns Tax-deferred retirement plans under scrutiny Simpson-Bowles Plan and other deficit reduction proposals: capping combined 401(k) & profit sharing contributions at $20K or 20% of income Raising age of Social Security eligibility Push for Lifetime Income options and guaranteed retirement income 41 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 42 14

15 Guaranteed Retirement Income Issue Annuity options and the safe money aspect of Cash Balance plans = greater political interest 43 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 44 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

16 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 46 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 Cash Balance 2012 Predictions 1. Continued strong CB growth driven by political/economic currents, tax climate, IRS rules 2. Increasing media coverage and public awareness 3. Competition & commodification: more players, more CB product offerings stepping up the game 48 16

17 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 49 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 50 Daily Valuation & Participant Technology 51 17

18 Web-based CB Solutions for TPAs 52 How Can We Help? Learn more about opportunities to grow your business with Cash Balance Plans: (877) CB-Plans Cash Balance Consultants 53 Beyond the 401(k) Order at Amazon.com Free chapter at CashBalanceBook.com 54 18

19 55 Thank You 56 19