Videos and Webinars

Cutting Edge Plan Design - Bringing Defined Contribution, Defined Benefit and Cash Balance Plans

Oct 17, 2017

In this retirement plan design webinar we discuss the benefits of bringing defined contribution, defined benefit and cash balance plans together.  In his retirement plan design webinar we discuss the benefits of cutting edge plan design and how bringing defined contribution, defined benefit and cash balance plans together can help you grow your business. 

We’ll  plans and cover important topics, including:
  • Current trends in the marketplace
  • Key industry terms
  • Specific strategies to help your practice grow
  • How Newport Group can help you set yourself apart from other advisors


Webinar Transcription

Speaker 1:  Welcome to Newport Group's webinar, Cutting Edge Plan Design: Bringing Defined Contribution, Defined Benefit, and Cash Balance Plans together.

Speaker 1: Before we get started, I would like to go over a few items so you all know how to participate in today's event. We've taken a screenshot of an example of the attendee interface. You should all see something that looks like this on your own computer desktop in the upper right-hand corner.

Speaker 1: You have joined the presentation listening using your computer's speaking system by default. This means if you can hear music through your computer, you should be able to hear the presentation. If you would prefer to join over the telephone, just select use telephone in the audio pane, and the dial-in information will be displayed.

Speaker 1: You will have the opportunity to submit text questions to today's presenter by typing your questions into the question pane of your control panel. You may send in your questions at any time during the presentation. We will collect these and address them during the Q and A session at the end of today's presentation.

Speaker 1: I would now like to introduce Speaker 1, Senior Vice President of Institutional Sales from Newport Group.

Speaker 1: Thank you, Speaker 1, and good afternoon, everyone. Like Speaker 1 mentioned, my name is Speaker 1 for those of you that I haven't had a chance to meet as of yet, and I have the privilege of leading our sales organization for our qualified business here at The Newport Group.

Speaker 1: Now, I'll tell you, we are thrilled to be able to host this call on plan design, and really, how to leverage your DC, DB, and cash balance plans together. It sounds like we have attracted quite an interest with over 200 advisors that have registered for this call. And again, we are extremely happy to be a resource to so many.

Speaker 1:  Today, when you look at the history of Newport Group and how we've come together and grown tremendously from a scale perspective, today, where our business sits, we really are positioned as one of the largest independent record keepers in the business. We believe that's a strong differentiator because we believe that aligns us on the same side of the table as advisors, and ultimately, the clients that we jointly serve together.

Speaker 1: As being an independent record keeper, and again, one of the largest, having an open architecture platform, being transparent in our fee schedules, and having no proprietary products, especially in this regulatory environment, we're really excited about what that proposition looks like to advisors and clients, and again, aligning ourselves with you to be able to earn your business every single day.

Speaker 1:  One of the ways that we do that is through thought leadership. That really brings us to our call today. There's lots of products that are in the marketplace, and there's lots of commodity that's in the marketplace, and there's quite frankly, a lot of clutter. What we want to do is set ourselves apart from the competition by offering all the things that I had mentioned, but most importantly, thought leadership to help you grow your practice in a meaningful way. The topic today, we believe, is especially of interest with advisors that work with professional service and industrial clients.

Speaker 1: Today, Larry Butcher, who is our Actuary Principal and leads the DB practice for Newport Group, is going to walk through, really, an interactive discussion on the assessment of the marketplace; where the industry stands today on these topics; and really, the power of plan design; and then ultimately, walking you through some very specific strategies on how to incorporate that, partnering with our firm to help you grow your practice not only for existing clients, but also prospective, and setting yourself apart as an advisor because we, again, really believe that it's all about differentiation, and if we can help you differentiate your value proposition to clients, we'll all thrive together.

Speaker 1:  Our speaker today, Larry Butcher, again, leads our Define Benefit and Actuarial practice here at Newport Group. He's a regular featured speaker at industry conferences, periodicals, and industry trade publication. With over 30 years of experience, his practical experience really comes into play, whether it's consulting over the phone, showing up to a finals conversation, and ultimately, being a resource for you as an advisor along with his team across the country.

Speaker 1: Now, dialing in from Madison, Wisconsin myself today, please don't hold it against my good friend Larry from Chicago, Illinois that he is indeed a Bears fan, but with that, I'm going to turn it over to Larry Butcher.

Larry Butcher: Thanks, Nick. How'd the Packers do the other night?

Speaker 1: Well, let's not talk about it, but touché my friend.

Larry Butcher:  Okay. One thing I want to mention, Micah said I am in Chicago, so if you hear sires and horns hocking, just normal course of business, so don't worry. I'll be all right.

Larry Butcher: Here's the agenda that we're going to go through today. We'll talk about the market; we're going to talk about what power of plan design means; and then we're going to go over some technical terms, but give you ideas of what's out there, how we do things, so forth and so on; explain what defined contribution plan is, defined benefit, cash balance plan, so forth and so on; and then we're going to get to a case study that may be typical of your existing prospects or something you're looking at to do.

Larry Butcher: What do we mean by bells and whistles? Well, we're talking about being able to go online, look at your accounts, 401(k) accounts, you can have a phone app that you can use to look at your accounts, all kinds of these sorts of things are what we refer to as bells and whistles. What happens is that we kind of lose focus on really what these plans are set up to do, especially I believe for this group, you're looking to maximize benefits, contributions for owners, or a select group of employees, and that kind of gets lost in all the other stuff that goes on: the investment advisory, the explanations, the disclosures, fees, so forth and so on. That's all background noise and we should really be focusing on what's the point of this plan?

Larry Butcher: So Pension Protection Act, hopefully everybody heard that, and hopefully, any of your existing clients had their 401(k) profit sharing plan restated for this law change. Needed to be done prior to April 30, 2016. It might be something to think about when you're looking at any existing prospects or looking to do some consulting is to check and see if that document's been updated.

Larry Butcher:  One of the good things, or a couple of good things that have occurred with the Pension Protection Act is auto enrollment, auto increases, Roth, QDIAs. For my side of the fence, cash balance got the stamp of approval back in 2006. We've seen a big, big surgence of cash balance plans being brought to the market for plan sponsors and certain other things.

Larry Butcher:  One thing that I want to mention on auto enrollment is most plans are set up with 3%, and the reason for that 3% is because of the Department of Labor notice that came out and used 3% as an example. You don't have to start at 3%; you could start at something much higher than 3%. It could be 4%, it could be 5%, it could be 6%, it could be something higher than that.

Larry Butcher:  What do we do when we try to design a plan?

Larry Butcher:  First off, if there is an existing document, I'd like get to get a copy of it so I can go through it and see is it really designed to meet the goals of the plan sponsor? Is it taking care of that select group of employees that you're trying to maximize at a lower cost for the rank and file? Does it have safe harbor provisions? Does it have the right investing schedule? Is it allocating the profit share and contribution on a cross-tested basis? Is the retirement age correct? All these kinds of things are what we look at and it's important in designing a plan.

Larry Butcher: A couple things. Again, you look at these plans, you carve them up, you try to figure out what's the best way to provide maximum contributions and benefits for a select group of employees. It could be a single decision maker, it could be multiple, it could be not only decision makers, but it could also be your executive management group. Those types of things have to be discussed in designing any kind of plan to provide retirement benefits.

Larry Butcher: How do we do some of these things? Well, you could do it with eligibility, minimum age. Should you have a service requirement? Should it be six months for salary deferral? Should it be a year? Should it be two years for profit sharing contribution? Can we have a one-year requirement for safe harbor?

Larry Butcher:  These things come into play in designing a plan of how to possibly exclude employees from benefiting a plan or including a group you want to. Investing schedules, defined contributions, you have to invest within seven years. Cash balance plans, you have to invest in three years. That all comes into play in designing a plan to meet the goals of the plan sponsor.

Larry Butcher:  Defined contributions: 401(k) plan, profit sharing plan, money purchase plan. For those of you who have been around a long, long time, target benefit plan. Those are all referencing a defined contribution plan because you're naming a contribution amount, and then you're going to allocate it to the individuals. That allocation of the contribution is what's going to provide a benefit at retirement age for the employees in the plan. Probably 90-something percent of all of these defined contribution plans are participant-directed, meaning they are picking the funds that are available in the plan to invest their contributions. They bear the responsibility of investment gain or loss, not the plan sponsor.

Larry Butcher:  Safe harbor. It has a lot of connotations in our world and you have to understand what it is that when we say safe harbor, what is it applying to? Is it the match contribution? Is it a design contribution? What are we referencing here?

Larry Butcher:  In the code section, there's two safe harbor definitions of how you can allocate a profit sharing contribution. The first one is you just allocate it in proportion to pay. For example, you have three employees. You have one employee whose compensation's $100,000, you have another one at $50,000, and a third for $20,000, so a total of $170,000 in eligible compensation. The employer wants to make a $10,000 profit sharing contribution. How do we allocate it?

Larry Butcher: What we do is we take the $100,000 divided by $170,000, multiply it by $10,000, that's their percentage. 50 as a percentage of $170, 20, so forth and so on. That's deemed non-discriminatory. You don't have to test for that.

Larry Butcher:  A second safe harbor is one that utilizes the Social Security taxable wage base. That's that $118,500. What it means is for those employees whose W-2 wages exceed the $118,500, they get more of a contribution than those who make below the $118,500. Again, once you allocate it using this tool, there is no testing going on. It's deemed non-discriminatory, and everything's just great for all the employees. There is the example of how that's done.

Larry Butcher:  Class-based is where you define groups in the plan document of how you're going to allocate certain profit sharing contributions to these groups. Generally, what I see is you have owners as a group, family relationships of the owners, highly compensated non-owners, and then the all-encompassing everybody else. What happens is you define a contribution for each of those groups, put the money into that bucket, and then you allocate that contribution to each of the groups in proportion to compensation.

Larry Butcher:  With this type of class-based allocation, you have to test to make sure you're not discriminating in favor of the highly compensated employees versus the non-highly compensated employees. A highly compensated employee, for those of you who don't know what that means, is anyone whose compensation in the prior calendar year or fiscal year exceeded $120,000, or you're more than a 5% owner, and then any family relationships to the more than 5% owners. Anybody who doesn't meet that definition is referred to as a non-highly compensated employee.

Larry Butcher:  I said a mouthful there.

Larry Butcher: Cross-testing. Cross-testing is not an allocation; it's a testing method. What we mean by that is we take these contributions that we're giving to everybody, and we take those amounts, and accumulate them with interest to retirement age. Depending upon your age currently versus the retirement age in a plan document, those buckets of contribution plus interest can be very large if you're a younger employee or very small if you're an older employee.

Larry Butcher:  What we do is we take that bucket of the contribution plus the interest and we annuitize it. What I mean by that is we take that pile of money and we say, "What would it provide as an annual benefit to this person at retirement age?" That benefit we've just annuitized, we take it as a percentage of pay, and it gives me a rate. We do that for everybody in the plan–all the employees that are eligibly in the plan has their own rate. What we do is we take the non-highly compensated and we need to make sure there's enough of them that falls into a rate group with the highly compensated employees.

Larry Butcher: It's kind of complex in what we do, and I tried to keep it simple, but that's what goes on behind the scenes for a cross-tested plan is we are testing the benefits as a percentage of pay. We make sure that we satisfy the non-discrimination rules and if we do, then everything's good to go. If we don't, then what happens is we have to tweak, give a little more profit sharing possibly to certain groups of non-highly compensated in order for them to pass the highly compensated grade group.

Larry Butcher:  Defined benefit plan. Defined benefit plan is one in which you are defining a benefit that somebody's going to get at retirement age, i.e. 1% of pay times years of service. That's your benefit at retirement age. Then what we do is we then figure out what kind of contribution has to go into the plan each year to provide that benefit? It's the opposite of the annuitize. We already know what we need at the end, how do we get there?

Larry Butcher:  If the employer makes a contribution on behalf of all of the employees to fund this benefit, the other thing that's kind of important is that this is a pooled account, meaning one account where all the money goes in to provide benefits for the employees. It's employer-provided and the employer, fortunately or unfortunately, bears the investment risk on the investment return. The good thing about it is if the plan isn't doing as well as it should or this or that, at least there's an amortization that gets taken care of to fund the benefits for the plan.

Larry Butcher: As I show on this slide, the maximum annual benefit for somebody who's been in a plan for 10 years and is at least age 62 is $210,000. Everybody says, "Oh, exciting!" What does that really mean? What it means is that $210,000, you would need to have at least $2.6 million in the plan to provide this annual pension. Again, assuming someone is age 62 and has been in the plan for 10 years.

Larry Butcher:  Traditional DBs, we don't see too many of those coming on new anymore. It's pretty much cash balance, but back in the day, it was very prevalent to have a traditional defined benefit plan where it was based on compensation, length of service, a percentage of your pay, and everybody got that sort of benefit when they retired at retirement age. Generally, this amount, depending upon the age of participants, would exceed the profit sharing limit along with 401(k) of $53,000, and that's why those plans were prevalent back in the day.

Larry Butcher: What's happened now is that nobody wants a traditional defined benefit plan. The employees don't understand it. They're not sticking around for 30 years. They don't really care what $100 a month means to them. They want to know what they're going to actually get in the plan, and that came with the advent of the cash balance plan. It is a defined benefit plan. You have to fund a cash balance plan, but what's unique about it, it looks like their existing 401(k) or profit sharing plan. I'll show you what that means.

Larry Butcher: What happens is in the plan document, you're going to define for everybody a pay credit. The pay credit could be either a percentage of pay or it could be a flat dollar amount. This pay credit goes into each person's account, kind of like a 401(k) profit sharing where you've got a beginning balance, here's your contribution, here's your interest, here's your ending balance. Same principle here in the cash balance. Again, it is a defined benefit plan, so the employer is providing this benefit to the employees that are eligible. It's, again, one account and the employer bears the risk of the investment return, whether it's positive or negative.

Larry Butcher: It's a pooled account, which may be good for those investment advisors on the phone. You're working with a larger contribution going into these plans than the typical salary deferrals of $100 a paycheck and all that sort of thing, so there's some advantages to this type of plan.

Larry Butcher: Differences between the two. Defined benefit's going to define something you're going to get at retirement age as a monthly benefit. Cash balance is you're going to see what you're going to get as a contribution every year and you don't know what that ending balance is going to be or what that ending balance is going to convert to as a monthly benefit.

Larry Butcher: The contribution or the pay credit for cash balance is based on current year's salary. This makes it easy for a plan sponsor to figure out what's going in to fund these benefits. It's based on current compensation. You add up everyone's compensation, multiply a percentage, that'll give you some idea of what you're going to have to contribute to the plan. As compensations increase, so do the contributions. As contributions decreases, so do the contributions for the employees, as well as the rank and file.

Larry Butcher: The only exception to that might be is if you define a group of employees that get a flat dollar amount, I.e. this group, administrative assistants or RNs or LPNs or whatever, they get $5,000 a piece. That has nothing to do with their current compensation. You can still quantify it. It makes it a lot easier for the plan sponsor; the employees understand what's actually going to be contributed on their behalf.

Larry Butcher: In this example, flat dollar amount or percentage of pay goes into each person's hypothetical account balance. As I say in this slide, the investment performance is borne by the plan sponsor. It's really important to understand that. Even though the thing looks like a defined contribution plan, it is still an employer provided benefit.

Larry Butcher:  Here's just a quick slide that compares the old traditional defined benefit. Here's your monthly benefit at retirement age. Who's excited about that? I'm not sure. Here's your cash balance statement. Speaks to volumes. Here's my beginning balance. Here's my plan contributions, which I refer to as your pay credit. Here's your interest. Here's the total. What you see in that account balance is what you're going to get, assuming your vested when you leave employment. Pretty powerful statement. Adds value to any plan sponsor because the employees understand this, the employer understands this, no one understands the slide on the left of what $4,625 a month's going to provide as a lump sump cashout.

Larry Butcher: Pointing on here is one of the things that we do when we look at plans existing or looking to start a plan is does just a 401(k) profit sharing plan make sense, does just a cash balance plan make sense, or does a combination of these two plans make sense for the plan sponsor, especially if you're looking to maximize contributions for the decision makers?

Larry Butcher: This is also commonly referred to as a combo plan, combo meaning you have two plans, and they leverage off each other to provide maximum benefits if that's what the goal is.

Larry Butcher: Kind of jumped ahead here, but yes, it is two plans. They leverage off each other, it does allow you to design these two plans to maximize benefits in both plans potentially, and a lower cost for staff members. There is quite a bit of tax savings and one of the things that I would say is when you put these plans together, and you show the contributions going in from the employer–cash balance, profit sharing, non-elective safe harbor–how much of that total dollars going in is attributable to the decision makers? I think anything that shows 60% or more of total dollars going to that group, that's a good deal because I'm assuming these decision makers are probably in the upper tax bracket, the 396, plus they're also going to save state income taxes, assuming their state taxes them.

Larry Butcher:  One of the unique things that only applies to these cash balance or defined benefit plans is coverage rules. It's kind of a little quirky thing here. What it says is look at all your employees, weed out the ones that aren't 21 or been there for a year, you can exclude collectively bargained employees or non-alien employees, and you need to make sure that of all the remaining employees, you're going to cover at least 50 employees or 40% of those eligible employees. It's a unique thing. It only applies to defined benefit plans, which is what a cash balance plan is. It does not apply to a 401(k) or profit sharing plan.

Larry Butcher: What we do is what I explained somewhat in the cross-tested plan, meaning we take these contributions and the pay credits for the cash balance, plus the profit sharing, give them interest from how old they are to retirement age, we annuitize them again. That annuity converts to a benefit, the benefit is a percentage of pay, and then we come up with rate groups for everybody. As long as we have enough non-highly compensated employees to be in the highly compensate group, then we pass non-discrimination testing. It's important. It's a little complex, as I said, and as the groups get larger, a little adjustment here or there can impact the rest of the results.

Larry Butcher: Let's get to the case study real quick.

Larry Butcher:  We have possibly a typical client of yours: 30 employees, profits are consistent from year-to-year, and that's one of the things you're looking at is finding clients whose revenues from year-to-year is consistent. You're not really interested in the ones that have that two or three-year window of a big spike, and then they come right back down to reality for the rest of the time. You're looking for something that's like your heart rate: a little bit up, a little bit down. You don't want anybody flat lining because that's not a good thing, but you want that kind of an employer because their revenue is consistent. Typically, you're looking at medical practices, professional service organizations, attorneys, CPAs. We're considered professional services, actuaries, I'm not sure why but we are. You're looking for those types of industries to implement this combo design because again, their revenue is consistent.

Larry Butcher:  We have three owners, 27 employees. The three owners I would refer to as a highly compensated employee. 27 employees are non-highly compensated employees.

Larry Butcher: As I click through the screens, you're going to see something highlighted in orange, and hopefully everybody has a color monitor to see that. Otherwise, I'm sorry, you're not going to see what's happening.

Larry Butcher:  I have the three doctors and the staff. They just have a plain old profit sharing plan and they want to get the maximum limit, which is $53,000. That's 20% of their pay gives them the $53,000 a piece. It's nice. The employees love it, but the employer isn't. The three doctors aren't because their costs for the staff outweigh what they're getting as contributions.

Larry Butcher: What we do or suggest is now let's take the first step and add a 401(k) feature into the plan. Add the 401(k) feature and what we do is then probably put in what's referred to as a 3% non-elective profit sharing contribution, safe harbor contribution. That 3% allows the highly compensated to put in maximum 401(k) deferrals, which is $18,000. If you happen to be age 50 or older, you get an additional $6,000 catch-up contribution.

Larry Butcher:  Doing that 3% allows the owners to put in $18,000, and whether the rank and file or the staff put anything in, it's immaterial. You satisfy the ADP test, and the average deferral percentage test. It allows them, highly compensated, to put in the max without having to take a refund because you failed that test. That's what the 3% non-elective buys. We're doing that and we're also putting in a profit sharing contribution of approximately 10% to get the owners to the $53,000 limit, and two of the owners are age 50 and above, they get the catch-up.

Larry Butcher: The good news is by making one simple design change, you've now cut the staff costs from $165,000 down to roughly $110,000, and you haven't changed anything other than you gave the doctors a little bit more because of the catch-up contribution. That's a win-win in my book.

Larry Butcher: Next step would be okay, we added a 401(k), everybody's happy, we cut some costs somewhat, so let's take the next step in the evolution: let's add a class-based designed profit sharing contribution. We would cross-test that profit sharing contribution.

Larry Butcher: What we've done is, again, we still have the 401(k) feature, we still have the 3% non-elective safe harbor contribution, and then we're going to put the three owners in the category and the staff in another, and put in profit sharing, and then test it. Like I said before, the contributions, annuitize it, that becomes a benefit of percentage of pay, and we end up with this illustration.

Larry Butcher: We went from $165,400 staff costs for profit sharing, and by making two design changes, two simple design changes, we drop that by almost a fourth down to $41,000. That's a winner, winner chicken dinner as they like to say around here sometimes. Of the $212,000 going in, only $41,000's going to the staff. Plan sponsors or the doctors here, they're getting $171,000. That's a pretty good plan design, and believe it or not, I take over plans or I look at plans that are looking to add a cash balance plan, I still see the profit sharing contributions being allocated on the safe harbor method, meaning in proportion to pay or at the integration level. Nobody's even talked to them about implementing cross-testing as an allocation method to skew more towards the decision makers.

Larry Butcher: One of the things that you want to look at in discussing anything with a prospective or existing client, is their plan document at least been modified to this illustration here on the third slide here with the cross-testing contribution, profit sharing, the non-elective safe harbor, as well as the 401(k) deferrals?

Larry Butcher: Finally, they want more. Who doesn't want more in retirement? We added a secondary play to go with their retirement program, and that's called a cash balance plan. As I reference here, it's the combo.

Larry Butcher:  What we've done is we took the cross-tested profit sharing, that's still in existence, and we added a new cash balance plan where we put three doctors in their own categories and we put the staff in another. We are now maximizing benefits for these three doctors and we've minimized the contributions for the staff. We went from our first feature of $165,000 for the staff, which only gave the doctors a total of $159,000, to a combo design that now cut the staff costs in half, cut it by $80,000, and added another $400,000 in deductions for the three doctors.

Larry Butcher:  Pretty good design and it's something that should be looked at for any existing any prospective client you're talking to because if you're not talking to them about adding a cash balance plan to the retirement program, somebody else is. We want to start identifying your existing or prospective clients to see if they're a good match to add a cash balance plan to their retirement program.

Larry Butcher:  We're at the point of any questions. I know we went kind of quick, but hopefully everybody absorbed it and maybe there are some questions.

Speaker 1:  Yeah, Larry, I've got a couple of questions on the line here that I know we have time for at least a couple of questions. If you're ready, the first question that we've got from the audience is what criteria are most commonly used to delineate classes? How finite can you make these classes? Some examples show up to three classes. Is it really possible to have more and under what circumstances would that be?

Larry Butcher: Okay. Generally, in the 401(k) profit sharing plan, you set it up that everybody's in their own class, which gives you total flexibility in allocating contributions to pass non-discrimination testing.

Larry Butcher:  In a cash balance plan, generally what you do is you set up each shareholder or owner as a class; and then if you have any family relationships, you're going to make them a class; and then you're going to have potentially highly compensated non-owners as a class; and then with the rest of the group, what you can do is you can set up job classifications for them. Meaning, for example, an accounting firm: you have bookkeepers, you have junior accounts, accountants senior, so forth and so on. You can make them all individual classes that you could give them a cash balance contribution or you could exclude them totally from the plan. When you start excluding certain job classifications, you want to make sure you still meet that coverage requirement that I discussed a couple slides back about the 40% test or 50 employees have to be receiving a contribution.

Larry Butcher:  Is there any-

Speaker 1:  All right, perfect. Yeah, let me ask one additional question from the field here. What information is needed to start a plan design assessment?

Larry Butcher:  We have a proposal request tool that you can request from our website, from Newport Group, or a salesperson that's in your geographic region. It's an Excel-based tool that asks some questions. For example, how is your entity tax? Is it a C corp? Is it an S corp? Are you a sole proprietorship? Are you a partnership? One of my favorites is they come back with the answer, "It's an LLC," which doesn't really mean a lot to us. How is the LLC taxed? Is it taxed with an 1120, 1120-S return? Is it a Schedule C, K-1 partnership return? We need to know that.

Larry Butcher: The other thing that it asks is have you ever sponsored a defined benefit plan in the past because we have to worry about that because that's what we refer to as a lifetime benefit, so we want to make sure we're not exceeding something along those lines. Do you sponsor a current plan, a SAP or as simple as a current plan, and we would to know that. Family relationships, names, dates of birth, dates of hire, who's the owners, if possible, whatever everybody's job classification is. How much are you looking to contribute to the plan? Everybody wants max, max, max, max, and then when you show an illustration with max, people tend to get a little quiet. You really want to hone in on what they want to contribute or what they feel comfortable contributing on an ongoing basis as a contribution.

Larry Butcher: What's I get that tool, and if there is an existing plan, I try to get a copy of the most recent adoption agreement or plan document so that in designing, say, a combo plan, we're not contradicting what the existing plan has as far as eligibility or retirement age or some of those plan provisions.

Speaker 1:   All right, perfect. That answers another question about some sort of fact finder, if we have a resource, and I think that addresses it. Quite frankly, our sales team is equipped with some of those tools, resources to then be able to provide an assessment into Larry's team.

Speaker 1:  Okay, the next question we've got here, and I apologize, a few questions are just coming in as you're speaking, but what is the difference of using market rate-adjusted cash balance and an interest crediting rate?

Larry Butcher:  Okay. In a cash balance, you have what they refer to as, again, a safe harbor definition for a market-rated return. What that says is you have about seven choices in picking an interest credit rate that meets this criteria. One is a fixed rate, and it cannot exceed 6%. You could tie it into Treasuries, or as this person's probably alluding to, an actual rate of return on investments.

Larry Butcher:  The thing about the actual rate on return of investments is depending upon the actual rate of return, whether it's negative or positive, can have an impact on your combined plan non-discrimination testing. We have to use that actual rate of return in converting those contributions into an annuity as a benefit percentage of pay, and as the interest crediting rate goes up, that benefit is good, it makes a larger benefit, larger benefit percentage of pay, then the downside to that is more profit sharing has to go in for the rank and file to pass non-discrimination testing. The opposite happens: if the rate of return's going down, we may not satisfy this 40% test, and we may have to amend the cash balance plan to give a larger contribution for the employees, which then can have an impact on the profit sharing on the other side.

Larry Butcher: Some people promote using actual rate of return, but you put in a floor of 3%, and then you put in a ceiling of 6%. You've now taken something that, in my opinion, is kind of simple, let's go with a fixed rate whether it's 4% or 5%, and you've now taken it and said, "Well, we're going to give you this, and then we're going to cap you at this," and nobody knows what's going on, and these interest credits, like I said before, can impact your combined non-discrimination testing.

Larry Butcher:  The other thing is if you're providing max, max benefits in a cash balance plan for somebody, and you have an interest credit rate that's about 6%, that might limit those max people from getting the maximum cashout from the plan.

Larry Butcher: Actual rate of return makes sense to me if you're setting up a cash balance plan that's of the benevolent side, meaning everybody's going to get some kind of benefit, some kind of tiered benefit you're going to grow versus I'm trying to maximize for a select group at the minimum cost for the rank and file. We tend to design plans with a flat rate of either 4 or 5% because the results of those really keep the employer contributions needed to pass testing consistent from year-to-year.

Larry Butcher:  Hopefully that answered the question. A little long-winded but-

Speaker 1:  Perfect. I believe it is very thorough. Thank you, Larry.

Speaker 1:  Next question we've got from the audience here is, "I understand changing the plan design to enhance what owners or preferred class can achieve as a benefit. However, is your experience that clients are willing to achieve that by reducing their staff's benefit, or potentially, ability to save for retirement?"

Larry Butcher:  Wow. You might have to read that one more time to me.

Speaker 1:  All right, sure. No problem. "I understand changing the plan design to enhance what owners or preferred class can achieve as a benefit. However, is your experience that clients are willing to achieve that by reducing their staff's benefit, or potentially, ability to save for retirement?"

Larry Butcher:  So let me see, by changing the plan or whatever, yes, you're making that change for a reason. I'm assuming it is to maximize contributions or give more to a certain group of employees, and yes, it could impact or probably would impact the rest of the employees and their ability to save for retirement. If the plan sponsor feels that's not great, they could keep their existing contribution level at the same level without cutting it for their staff and still amend the plan to enhance the plan for decision makers or the group you're trying to.

Larry Butcher: You could do that. You don't always have to go in, slash, and burn to achieve a larger amount for the people you're trying to take care of. You could keep the rank and file or staff at the same level. You could still do that.

Speaker 1:  It also ultimately comes down to flexibility of plan design, and really, what that owner is trying to accomplish in the end, right?

Speaker 1: All right, the next question here: how do you feel about using a floor offset plan design for the cash balance plan?

Larry Butcher:  I'm not a big proponent of it. The reason is there's about seven things you have to worry about floor offsets, and it's a little complex, and I don't want to go through all of them, but there's a separate tracking of the DC account balances; you have to worry about employees that are different in age but same comp, and one's getting a cash balance contribution, the other one isn't; you have to worry about those that offset plus the cash meet the meaningful benefits test on the cash balance side, that 40% rule; and some other things that go into play.

Larry Butcher: I know they're out there. I just attended a conference here in Chicago and there's probably 150 people like myself there, and the question was how many people are doing floor offsets? I think two people raised their hand out of the group.

Larry Butcher:  I think you can accomplish the same thing by designing the cash balance plan to do what it needs to do without having to offset and do all these other hoops you've got to jump through to make sure that you're passing non-discrimination, you're tracking the contributions correctly. You want to make sure that the profit sharing and employer is a pool account versus participant-directed because the pool account, you control the rate of return. The rate of return impacts the offset benefit.

Larry Butcher: You're just adding a lot more complexity to a plan design to achieve maybe a marginal, marginal better percentage going to the owners or decision makers. I'm not a big fan of floor offsets. I know they're out there, but I see a lot more negatives for a floor offset versus positives. And the employees will never understand it. They won't.

Speaker 1:  Right. Simplicity, at times, trumps any complexity, right?

Larry Butcher: Correct.

Speaker 1:  Well, Larry, thank you very much. Those are all the questions that we go to.

Larry Butcher:   Great.

Speaker 1:  We'd like to wrap here. Again, very much appreciate your time.

Speaker 1:  One of the things that I'll end with is where we started around the concept of thought leadership. As you can see, Larry Butcher and his team are just a wealth of knowledge in terms of how to think through plan design differently to, again, differentiate yourself at the point of sale either with existing or potential clients. All of us here at Newport Group would love to be able to earn your business, and again, add value to the equation.

Speaker 1:  You'll see on the screen now is our sales team map. We have what we believe is really the best in the business in terms of 27 people around the country in all categories and in all geographic regions to be able to support advisors to help earn your business, not only in defined benefit, cash balance plans, and the topics that we spoke about today, but of course, 401(k), 403(b), 457 ESOPs, case-ups, non-qualified deferred comp, and in addition to our 316 capability on the administrative fiduciary program that we recently launched here.

Speaker 1:  We try to make it very easy and simple for advisors to do business with us in terms of our comprehensive approach to the retirement plan market. We'd love to, again, learn a little bit more about your practice, if we haven't had a chance to meet you as of yet. There will be followup from this national webcast with a link to additional information on this topic and many more to come. You'll see more and more about the Newport Group and our ability to communicate thought leadership through social media and other venues to be able to share information, and again, in an effort to grow your practice and differentiate yourself in the retirement plan marketplace.

Speaker 1: On your way out, we do need your help with one thing. The only way that we continue to make these webcasts and thought leadership calls even better is to get your feedback. If you wouldn't mind taking a moment, as you're signing out, you'll get a few questions on a survey. If you can take just a few minutes to fill those out, just have a few simple questions to ask, and it really helps us invest in resources to make these programs the best that they possibly can be and as relevant as possible. If you don't mind taking time as you sign out to be able to go through that.

Speaker 1:  Again, thank you all very much for your time, and attendance, and interest, and we look forward to earning your business going forward. Have a great day and a great weekend.
 

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