While the government helped clarify an employer's legal obligations over this at the end of 2010, Witman says it won't stop the lawsuits. "Unlike a 401(k) or a defined contribution plan, when you run it properly you're going to be OK." Not so with a CBP. "You better have a really good actuary who periodically adjusts the plan," he says. "Being a lawyer, I see the problems as they ensue. Your investments are more subject to scrutiny."
That sentiment goes a long way toward explaining the lack of awareness among the universe of small business users. But is it that simple? In these uncertain times, everyone wants stable income over the long haul. CBPs offer that. So they do have their cheerleaders.
A paper this past spring asked, "Is It Time to Reconsider Cash Balance Plans?" It said new IRS rules mitigate the risk for companies by allowing account values to increase only year by year. "Essentially, cash balance plans act like stable-value funds, providing a dependable floor of protection." They can save as much as 2% of payroll each year. While there is no guarantee, it may be a risk worth taking.
One strong supporter of CBPs is Kravitz Inc., an Encino, Calif.-based administrator and manager of retirement plans. Using IRS numbers from 2009, Kravitz found that the growth rates of CBPs significantly outpaced those of 401(k)s. From 2001 to 2009, the number of CBPs grew about 20% annually versus 3% for 401(k)s. By 2008, it said, CBPs made up 11% of all DB plans, and the firm predicted the number would jump to 15% for 2010 after all filings were assessed.
Kravitz said that 82% of companies with CBPs have fewer than 100 employees. (Medical and dental groups, incidentally, accounted for 37% of all CBPs nationally.) Such companies are a prime constituency for planning firms working with small businesses.
Kravitz points to other benefits of CBPs over traditional DB plans: With individual account balances, they're easier to understand; they remove the interest rate risk that leads to constantly changing values of liabilities; and they allow for more consistent contributions to employees, rather than uneven age-based contributions.
Because of eloquent spokesmen such as Prendergast and Kravitz, it may not be long before small businesses and the planners who serve them become more familiar with CBPs.
Robert Laura is president of SYNERGOS Financial Group, author of Naked Retirement (http://www.nakedretirement.com) and co-founder of RetirementProject.org. Laura can be reached at 888-267-1138.