Market Rate of Return Cash Balance Plans

[austin3515]

If a plan has the Rate of Return pegged to something like the S&P500, and the S&P goes down 20% in 2025, but then goes up 10% in 2026 , what happens to participant hypothetical accounts?  For example, if someone's hypothetical account was $10,000 on 1/1/2025, it stays at $10,000 through 12/31/2025 because the benefit can never go down.  My big question is will there account still be at $10,000 at 12/31/2026, because the 10% return in 2026 was not enough to make up for the losses in 2025? i.e., is it a cumulative tracking?  Or is the ROR always just pegged to the ROR specified in the doc for that year, with all prior returns (or losses) ignored? 

[John Feldt ERPA CPC QPA]

My understanding is that it is cumulative, that the preservation of capital requirement applies upon distribution unless the terms of the plan dictate otherwise, such as a zero percent annual floor.

Using actual ROR can cause high 401(a)(26) minimums when there are low or negative investment returns and can cause low 415 lump sum payout limits when there are high investment returns, so be careful out there!