Invest in gold?

I have a client with a small cash balance plan (about 10 participants). The owner/trustee wants to invest in gold bullion. Is this allowed? If so, any specific % limit, or just the "reasonable man" standard? And where would the gold need to be stored?

Allowed, yes. Advisable I'll leave that to others. As to where and how it is stored, it could be a Prohibited Transaction if not stored and held by a non-party in interest. Since gold bullion is not a "qualified asset" you may have higher bonding requirements and would not be able to file a Form 5500-SF.

I’ve never needed to think about funding formulas regarding a cash-balance pension plan. If the value of the gold is meaningfully down as at a year’s close, could that increase the employer’s funding obligation?

In general, the required contribution in a defined benefit plan is based on the difference between the market value of assets and the actuarial present value of accrued benefits, measured on the plan's valuation date. A significant decline in the market value of assets could result in an increase in the plan's required contribution (conversely, a sudden rise in the value of plan assets could result in a reduction in the maximum contribution, possibly to the dismay of an employer who was looking forward to a large tax deduction).

The increase in the required contribution due to a drop in plan assets may not be dollar-for-dollar however, as the "funding shortfall" amount is amortized over a period of 15 years.

This only speaks to the minimum required contribution under ERISA 303 / IRC 430. Plans may have a funding policy that directs the employer to contribute an amount larger than the required minimum.

Cash balance plans may use an interest crediting rate based upon the actual rate of return of plan assets, which may even be negative (although the "preservation of capital" rule of 26 CFR 1.411(b)(5)-1(d)(2) prevents the interest credit rate from being negative on a cumulative basis). Proponents of these formulas claim that it ensures that plan liabilities will always be in line with assets; in other words, if the sponsor contributes the amount of the pay credits each year, then the assets will always equal the hypothetical account balances. This may be true, however it can be problematic for smaller plans, especially those that are tested together with a DC plan.