Cash Balance Plan Fees

We’re starting to see a lot of interest from prospective cash balance plan (CBP) clients as we march towards the end of 2010. Small and midsize businesses are attracted to the large retirement deduction opportunities of CBPs. After explaining the technical details of these plans, prospective clients invariably ask the question: What are the fees for a cash balance plan?

As we mentioned in our previous Eyes Wide Open post, cash balance pension plans generally have higher administrative fees than a defined contribution (DC) plan such as a 401(k) or profit-sharing plan. You need to make sure that you will get enough CBP deduction benefits to offset the recurring fees.

Here’s a quick checklist of the four main categories of cash balance plan fees:

1. Plan start-up fees: These are one-time fees associated with the implementation of the pension plan. They include:

a. Plan design consulting with your actuary

* Note: this step is VERY IMPORTANT. A bad plan design can cause all sorts of problems down the road. Moreover, the design stage will help you determine whether a CBP is even a good option for you.

b. Drafting plan document

c. Legal fees for plan document review

d. Fees for submitting the plan for IRS approval, if desired

2. Recurring plan maintenance fees: Cash balance plans are a form of defined benefit (DB) pension plan, and therefore have a number of recurring compliance projects (and fees) required by the IRS. They include:

a. Annual actuarial report to determine IRS pension contribution limits

b. Annual funded status certification

c. Benefit statements to participants

d. IRS Form 5500 filings

e. PBGC pension insurance premiums and filings (for certain plans)

f. Nondiscrimination testing

g. Other administrative costs such as benefit calculations and trustee fees

3. One-time plan fees: These can vary quite a bit from year-to-year. Some examples might be:

a. Plan document updates (e.g., for plan benefit changes or law changes)

b. Fees for one-time administrative changes (e.g., new government filing requirements)

c. Occasional consulting with plan actuary or plan attorney regarding such things as credit balances, quarterly contribution requirements, and other issues.

4. Plan termination fees: At the end of their lifespan, DB pension plans are terminated and the assets are distributed/rolled-over to participants. This is an involved process and requires quite a bit of work on the part of the plan actuary and/or attorney. A rough estimate of fees might be around two times the annual valuation fees, but it can vary widely depending on the complexity of the plan termination.

So, you’re probably looking at this list of fees and thinking “these cash balance plans sound really expensive!” It’s true that cash balance plans aren’t cheap. However, they can provide significant value in the right circumstances. It’s really during the plan design stage (see item 1. above) – or even before, see some FAQ’s – that you can  gather the information to make an informed decision.