What The Wall Street Journal Gets Right About Cash Balance Plans

A recent Wall Street Journal article explores how cash balance plans may offer business owners the best of both worlds: the large contribution limits and tax deduction of a defined benefit plan, with the flexibility and familiarity of a defined contribution plan.

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Here's What You Should Know

At Lafayette Life Retirement Services, we agree that these plans are a compelling tool when used appropriately – but it’s important to understand the assumptions and requirements that underpin the results cited in the article.

Although the situations vary, the additional context below will help you better understand the article and evaluate whether a cash balance plan may be suitable for your situation. When you’re ready to learn more about cash balance plans, Lafayette Life’s Retirement Services’ specialists are here to discuss plan design and administration.

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Key Assumptions Behind the Article

1. Business Ownership or Compensation Structure

Most of the individuals referenced in the article are owners or partners in closely held businesses or professional service firms (e.g., doctors, attorneys, consultants).
Contribution limits in a cash balance plan are age-based and tied to compensation, with the highest allowable contributions typically available to older owners with high earnings and stable business cash flow.

2. Plan Design to Maximize Contributions

The “$3.6 million” retirement benefit cited is based on IRS maximum limits and assumes aggressive plan design assumptions (i.e., interest rate, mortality tables, and retirement age).
Actual contribution limits may differ depending on your plan’s assumptions, and Lafayette Life may apply more conservative actuarial factors.

3. Paired 401(k) Profit Sharing Plan

Many plans referenced in the article combine a 401(k)/profit sharing plan with a cash balance plan, which allows for additional savings beyond the cash balance contribution alone.
Together, these allow a business owner to potentially contribute more than $300,000 annually across both plans.

4. Required Contributions to Other Employees

To meet IRS nondiscrimination testing, businesses must typically provide meaningful contributions to staff, usually in the 5%–7.5% of pay range for non-highly compensated employees.
A business must consider these additional costs as part of a full feasibility and design review.

Business owner meeting with two financial professionals

How Cash Balance Plans Are Funded

Cash balance plans are technically defined benefit pension plans and must be funded by the sponsoring business. Key considerations include:

Employer-Only Funding: Contributions come from the employer and must meet annual funding thresholds.
Conservative Investment Strategy: Many plans use a fixed interest crediting rate (typically 3%–5%), which the plan’s assets are expected to support.
Funding Vehicles: While the WSJ article doesn’t address funding strategies, actual outcomes vary significantly based on the investment mix. Options may include mutual funds, annuities, fixed income or life insurance—selected based on risk tolerance, return expectations and funding goals.
Insurance Considerations: If life insurance is used as a funding vehicle, benefits and cash values depend on product design, credited interest and internal policy charges.

Business man working on laptop and taking notes

Disclosures & Suitability Considerations

Not all businesses are a good fit. Cash balance plans are best suited for profitable businesses with consistent income, favorable employee demographics and long-term planning needs.
Results vary. Scenarios in the WSJ article are illustrative and depend on individual facts and circumstances.
Compliance is key. All plans must meet IRS rules on participation, funding, and nondiscrimination.
Investment performance matters. If insurance or annuities are used, their guarantees depend on the claims-paying ability of the issuing insurer.
Life insurance is optional. While many of our clients use Lafayette Life products, a variety of funding options are available depending on your strategy.

Want to Learn More?

Lafayette Life Retirement Services specializes in the design and administration of cash balance plans for successful business owners and professional firms. Our team can help determine whether a plan is a fit for your business and provide a detailed, custom proposal outlining potential contributions, tax benefits and funding options.

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IMPORTANT DISCLOSURES

The Lafayette Life Insurance Company does not provide legal or tax advice. The information herein is general and educational in nature and should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact investment results. Lafayette Life cannot guarantee that the information herein is accurate, complete, or timely Lafayette Life makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Please consult an attorney or tax professional regarding your specific situation.

The Lafayette Life Insurance Company provides services to pension plans as outlined in a separate Administrative Services Agreement, and issues life insurance and annuity products that may be used as funding options. This material is for informational purposes only. Lafayette Life does not serve as plan administrator or fiduciary, nor does Lafayette Life or its representatives provide ERISA, legal or tax advice. Your personal or legal tax advisors should always be consulted and relied upon for advice.