Cash Balance Plan - Self-directed?

[Dougsbpc]

Is anyone familiar with a self-directed cash balance plan? Are they even possible? I saw some old posts where this was discussed but nobody was familiar with the specifics.

We have a group of physicians that would like to have a self-directed cash balance plan. Each physician would have their own brokerage account.

Thanks.

[rcline46]

A self directed DB plan - not a good idea. You can give market rate earnings in a CB plan, but considering the minimums required, floors on the hypothetical account balances and such stuff, not a good idea even if legal.

[My 2 cents]

A self directed DB plan - not a good idea. You can give market rate earnings in a CB plan, but considering the minimums required, floors on the hypothetical account balances and such stuff, not a good idea even if legal.

Agreed! It is still going to be a defined benefit plan, with no necessary match between assets on hand and the sum of the account balances. Allowing self-direction in a defined benefit plan is quite different from self-direction in a defined contribution plan. In extreme (or even not-so-extreme?) cases, it becomes a "heads I win, tails you lose" situation since the punishment for overly aggressive selection by the participant will fall, in large part, on the sponsor, especially since the absolute worst that can happen to the participant is to have an account balance equal to the cumulative pay credits, while the assets backing that account could be wiped out entirely.

[AndyH]

Separate asset pools are separate plans for purposes of 401(a)(26).

[My 2 cents]

Separate asset pools are separate plans for purposes of 401(a)(26).

Not sure what that means. A self directed cash balance plan is ONE plan, so the most that could be taken into account by that plan would be limited by 401(a)(26). Separate investment options are most certainly NOT treated as separate plans! That couldn't possibly be correct.

Further, I cannot imagine that one can have several investment options and treat them as separate for purposes of applying the requirement that investment losses not bring the balance below the sum of the pay credits. Say someone is maintaining three investments in the cash balance account. One is earning a steady 5%, another has a cumulative rate of return of 10% and the third has lost 30% of its value. The participant does not get to keep the positive returns on the first two and enjoy a floor of 0% on the third. It MUST be the case that the losses on the third investment siphon off gains from the other two before the 0% floor can be used as a fail safe. The sum of the three cannot go down below the total of the pay credits but that does not mean that there can be an investment-specific floor of 0% for each individual investment. That surely has to be impermissible.

[AndyH]

I am merely trying to point out 1.401(a)(26)(2)(d)(1)(iii)

(iii) Defined benefit plans with other arrangements

(A) In general. A defined benefit plan is treated as comprising separate plans if, under the facts and circumstances, there is an arrangement (either under or outside the plan) that has the effect of providing any employee with a greater interest in a portion of the assets of a plan in a way that has the effect of creating separate accounts.

[My 2 cents]

I am merely trying to point out 1.401(a)(26)(2)(d)(1)(iii)

(iii) Defined benefit plans with other arrangements

(A) In general. A defined benefit plan is treated as comprising separate plans if, under the facts and circumstances, there is an arrangement (either under or outside the plan) that has the effect of providing any employee with a greater interest in a portion of the assets of a plan in a way that has the effect of creating separate accounts.

My apologies - I confused 401(a)(26) with 401(a)(17). I still think that self-directed cash balance plans are a bad idea, probably intended to get around the 415 limitations applicable to defined contribution plans.

Assuming that allowing physicians to set up cash balance plans with pay credits several times as great as what would be permissible under defined contribution plans is not a good use of tax dollars, what harm would there be if the rules for cash balance plans were changed to not permit pay credits higher than the defined contribution 415 limits? What good reason is there for allowing cash balance plans to be better tax-favored savings vehicles than defined contribution plans?

[Mike Preston]

This is an area which is not well settled. There are some who take the position that in the absence of truly separate investment pools which directly define the ultimate benefit entitlement one does not run afoul of a26. Hence, they would argue that in this case the mere presence of the floor effectively creates that absence. Others amongst us (some would say the more conservative) think that it is a little like that infamous Supreme Court ruling: hard to define but they know it when they see it.

[SwimmingInBowelsOfERISA]

From an advisor's perspective only, I would never recommend self direction of any DB plan (even at the discretionary trustee level unless they are investment experts) and I'm not even sure that it is possible under a single plan arrangement with participant directed vs a pooled, trustee directed account.

Oddly enough, I just posted a similiar discussion about a physicians group that approached me today about self-direction (including alt investments like RE and nonpublically traded securities) in their k/ps plan.

Always seems like doctors want more ways to screw themselves. I guess when you are an expert at the human body you automatically qualify as an expert in everything.

At a minimum, I would think that the Prudent Man rule might preclude this arrangement given the nature of cash balance plans.

"A fiduciary must act with the care, skill, prudence and diligence that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise with like character and aims."

[My 2 cents]

The problem is that if the plan is truly self-directed, each participant is his or her own fiduciary. Deciding whether to allow a plan to permit self-direction of the investments is probably a "settlor function" and not a fiduciary act.

I have the greatest respect for doctors, but there are doctors out there (apparently) who would do anything they could (up to and including bending the laws of physics) to reduce the amount of taxes they owe, even if it meant that their after-tax income was lower. Paying $1,000 on income of $1,500 is almost seen as worse than not having the $1,500 income at all!

As for self-directing investments, it brings to mind the old saying that a lawyer who represents him or herself has a fool for a client.

[SwimmingInBowelsOfERISA]

The problem is that if the plan is truly self-directed, each participant is his or her own fiduciary. Deciding whether to allow a plan to permit self-direction of the investments is probably a "settlor function" and not a fiduciary act.

I have the greatest respect for doctors, but there are doctors out there (apparently) who would do anything they could (up to and including bending the laws of physics) to reduce the amount of taxes they owe, even if it meant that their after-tax income was lower. Paying $1,000 on income of $1,500 is almost seen as worse than not having the $1,500 income at all!

As for self-directing investments, it brings to mind the old saying that a lawyer who represents him or herself has a fool for a client.

Agreed, but even if it is a settlor function to allow self direction (is it even possible in a DB plan as a single plan?) the trustee I would THINK might still be on the hook. An analogy would be participant directed 401k accounts. If the responsible fiduciary allows participant direction, they can still be on the hook for positive or negative investment direction, mitigated somewhat by compliance with 404© and application of QDIAs. What happens if a doc (or couple docs) don't make any directed investments? Not to mention the effects of poor investment decisions by some or all docs on the plan funding requirements? I can't envision any scenario where self direction in a DB plan is a good idea.