OK so you have your cash balance plan document and you are ready to fund the plan. But a couple questions remain. What are your cash balance plan investment options and how should you invest plan assets?
As you know, we at Emparion are not investment advisors. As such, I’m not going to give you any investment advice or stock tips. Our plans are completely portable and you can use them with basically any provider. This includes Charles Schwab, Fidelity and Vanguard. We can even help you get your account set up with them.Quick Navigation
- What can I invest the money in?
- Is there a certain strategy?
- Do I have to have an annuity?
- Can you invest in real estate?
- Finalizing your investment approach
- Bottom Line
What can I invest the money in?
The good news is that cash balance plans allow you to invest in almost anything. Most plans will be invested in mutual funds, stocks, bonds and CDs. This is just like a 401(k) plan. Employees do not have the ability to “self-direct” assets as all the funds are held in a pooled account.
Many business owners believe that the third-party administrator (TPA) who establishes the plan will also be in charge of managing the plan. They think that funds must be contributed to a specific investment vehicle. This is simply not the case.
Most people simply set up an account with their financial advisor or with an online broker like Vanguard, Charles Schwab or Fidelity. You simply open up a pension trust account or retirement trust. It isn’t really a “special” account because it is what you would do essentially to open up a 401k.
Is there a certain strategy?
So what type of strategy should you employ with your cash balance plan investments?
Plans are set up with an interest rate credit. So in theory the business owner should attempt to match this amount. But this can be tougher than you might think.
Even though you want nice investment returns, you want to limit volatility. If volatility is low it will not have much impact on your annual contributions.
But be careful with highly volatile investments (Bitcoin is one that comes to mind). If a plan invests in speculative stocks and there is a large decline, this will generally result in larger funding contributions in future years. Essentially, you have to “catch-up” your contributions for the lower returns.
However, the contrary can occur. If the plan has large investment returns, the result can be lower contributions in future years. We all want to have high investment returns, but lower funding levels is not necessarily great for a high earner who is looking to maximize tax deductions.
Do I have to have an annuity?
No. Plans are technically set up to provide a certain annuity at retirement. But the reality is that most plans will be terminated long before retirement benefits are paid out. The funds are typically rolled over into an IRA.
The plan does have the option to set up an annuity that can pay benefits over a participants life. Upon plan termination, assets can be used to acquire an insurance annuity. But often employees choose to take a lump sum distribution.
Can you invest in real estate?
So maybe you want to get a plan set up but you want to invest in real estate. Can you do this? How does this even work?
Yes you can do this. But before we move any further, let’s clarify that this strategy works best for owner-only businesses. Even having your spouse as an employee is okay. If you have employees that qualify for benefits, this plan might be a little challenging to execute.
Finalizing your investment approach
Cash balance advisors play a vital role and can offer flexible investment options on their platforms. These custodians don’t always provide the most diverse investment options, but they will provide for easy set up and administration.
Many businesses don’t realize that our plans can be used with any of these providers. Our plan documents can be used to open up an account in as little as a few days. That allows you to get our structuring and planning services in combination with the investment offerings of the large discount brokerages. So don’t hesitate to consider Vanguard, Fidelity or Schwab.
So at the end of the day you have plenty of investment options. While you want to maximize your investment returns, try to avoid too much volatility. This can cause wide swings in contribution amounts.
Make sure that you deal with an investment advisor or plat form that understands the investment risks associated with these plans. That way you can sleep at night.