What is a SMA?

Also known as a SMA (“Separately Managed Account”), is a single investment account comprised of individual stocks, bonds, cash or other securities, tailored to achieve specific investment objectives.

Your portfolio manager oversees the investments according to your specific investment objectives and in an investment style with which you are comfortable.  Put simply, a SMA is for demanding investors who:
  • Seek the comfort of professional investment guidance and a heightened level of personal service
  • Still want to take an active role in their financial life
  • Desire the flexibility to invest in different strategies or styles, while seeking the liquidity and potential tax benefits that come from owning individual securities in separate accounts, versus mutual funds
  • May want a single fee to cover ALL account costs, including trading costs and performance reporting.
  • Low-cost, transparency and 24/7 online access

For those with more than $100,000 a SMA may be the smart way to manage portfolio assets, due to lower costs, greater tax efficiency and transparency.

Why the growth in Cash Balance Plans?

The Pension Protection Act of 2006 (PPA) is long and hard to read, but it played a crucial role in establishing cash balance plans as a viable and legally recognized retirement savings option. Before 2006, cash balance plans faced frequent legal challenges. Those bringing the suits argued that cash balance plans violated established rules for benefit accrual and discriminated against older workers. The rulings on these cases were inconsistent, and many business owners were reluctant to risk establishing a plan that just didn’t have firm legal footing.

The Pension Protection Act ended this uncertainty about the legality of cash balance plans. The legislation set specific requirements for cash balance plans, including:

  • A vesting requirement: Any employee who has worked for their company for at least three years must be 100% vested in their accrued benefits from employer contributions.
  • A change in the calculation of lump sum payments: Participants in a cash balance plan can usually choose to receive a lump sum upon retirement or upon the termination of employment instead of receiving their money as a lifetime annuity. Before 2006, some plans used one interest rate to calculate out the anticipated account balance upon retirement, but, when participants opted to receive an earlier lump sum, the plan called for using a different interest rate to discount the anticipated retirement balance back to the date of the lump sum payment. This could lead to discrepancies between the hypothetical balance of the account (as determined by employer contributions and accumulated interest credits) and the actual lump sum payout, an effect known as “whipsaw”. The PPA eliminated the whipsaw effect by allowing the lump sum payout to simply equal the hypothetical account balance.
  • Clarification on age discrimination claims: A cash balance plan does not violate age discrimination legislation if the account balance of an older employee is compared with that of a similarly situated younger employee (i.e. with the same length of employment, pay, job title, date of hire, and work history), and the older employee’s balance is equal to or greater than the younger employee’s.

There are, of course, many other points included in this lengthy piece of legislation, but the takeaway is this: the Pension Protection Act of 2006 removed the legal uncertainty surrounding cash balance plans and made them a much more appealing option for small business owners. The number of cash balance plans in America more than tripled after the implementation of the PPA. Additional regulations in 2010 and 2014 made these hybrid plans an even better option, and we anticipate that their popularity will continue to grow. There are thousands of high-earning business owners out there who can reap huge, tax-crushing benefits from implementing cash balance plan – they just have to know about them first.

The best charities to give to in the wake of Hurricane Harvey

Over the weekend, Hurricane Harvey slammed into the Gulf Coast, destroying homes and infrastructure in Texas, displacing tens of thousands of people, and killing at least eight. As many as 13 million people are under flood watches and warnings.

After landfall, officials ordered several Houston-area counties to evacuate, due to fears of more flooding. Experts are forecasting up to 50 inches of rain in and around Houston, making many homes inhabitable. An estimated 30,000 people will likely need to find refuge in shelters, since flooding will linger, according to The Washington Post.


People walk down a flooded street as they evacuate their homes after the area was inundated with flooding from Hurricane Harvey on August 28, 2017 in Houston, Texas. Getty Images


Victims in Texas and Louisiana will likely need millions of dollars in aid. On Monday, President Donald Trump said he believes Congress will act swiftly to provide funding to affected areas. Charities — both big and small — will also step in.

But not all charities are created equal. Charity Navigator, a nonprofit that has independently rated over 8,000 charities, compiled a list of some of the best organizations to donate to in the wake of Harvey. Its team considers several factors when giving a charity a score out of 100. These include program expenses (e.g. how much of the donations go straight to victims) and transparency (e.g. audited financials prepared by an independent accountant).

The charities that Charity Navigator recommends for Hurricane Harvey, along with their scores out of 100, are below.

Note: Right now, it is not clear whether all these organizations will spend 100% of donations received on Hurricane Harvey relief and associated expenses. But in past large-scale disasters, high percentages of donations have directly gone to victims.


St. Bernard Project — 93.66

Founded in 2006 after Hurricane Katrina, St. Bernard Project works out of a parish near New Orleans. After disasters, the organization rebuilds homes, advocates for recovery strategies, and advises policy makers, homeowners, and business owners about resilience.

Samaritan’s Purse – 96.32

Smaritan’s Purse is a nondenominational, Christian organization that provides spiritual and physical aid to people affected by disaster and poverty around the world. It focuses on helping victims of war, poverty, natural disasters, disease, and famine.

GlobalGiving — 96.46

Founded in 2003, GlobalGiving is a funding platform that helps people find causes they care about. Users select projects they want to support, make a contribution, and get regular progress updates.

Convoy of Hope — 96.46

Convoy of Hope is a faith-based nonprofit that works to fight hunger around the world. Founded in 1994, the Springfield, Missouri-based charity also responds to disasters.

All Hands Volunteers — 96.66

All Hands Volunteers works to address the long-term needs of communities affected by disasters. Over the last 12 years, the organization has enlisted over 39,000 volunteers who helped 500,000 people worldwide.

Americares — 97.23

Since its founding in 1979, Americares has provided more than $13 billion in aid to 164 countries, including the United States. It is headquartered in Stamford, Connecticut, and specializes in fighting ongoing health crises.

Direct Relief — 100

Direct Relief is California’s largest international humanitarian nonprofit organization. It provides medical assistance to help people affected by poverty and disaster in the US and around the world.


Other local organizations

  • Houston Food Bank
  • United Way of Greater Houston
  • Food Bank of Corpus Christi
  • Houston Humane Society
  • San Antonio Humane Society

These local charities have all received scores between 85 and 100, and work in the most heavily affected areas of Houston.

Sara Nason, a Charity Navigator spokesperson, told Business Insider that choosing between donations to a local or national organization is a matter of preference. The main thing to look for is that the charity is an established and highly-rated organization.

“Local organizations will continue to work in the community long after the disaster has happened, as they have an established presence in the community. National and international organizations deal with disasters at a large scale, with an established infrastructure and coordinated teams that specifically hold a skill-set for responding to crises,” she said in an email.

400% Top-line Deductions?

Despite the explosive growth and substantial tax benefits of cash balance plans, most Americans are unfamiliar with one of the best tax-deferred savings opportunities in existence. When combined with a 401(k) profit-sharing plan, cash balance plans substantially increase the contribution limits for retirement plans, sometimes increasing available top-line deductions by over 400%. This means that participants, particularly older contributors, can accelerate their retirement savings and simultaneously take advantage of significant tax savings.

Cash balance plans are classified as “hybrid” retirement plans: defined benefit plans (think traditional pension plan) that function like defined contribution plans (think 401(k)). Like a defined benefit plan, the ultimate benefit received is a fixed amount, independent of investment performance. The plan sponsor directs investments and ultimately bears investment risk. What sets a cash balance plan apart, though, is its flexibility and hybrid nature that makes its function appear similar to that of a 401(k).

When businesses choose to add a cash balance plan, they generally do so on top of an existing 401(k) profit-sharing plan. This allows high-earning employees to put away more money for retirement at a much faster rate while providing significant tax savings.

Those who stand to benefit the most from a cash balance plan include:

• Professionals with high incomes such as doctors, engineers, lawyers, orthodontists, etc.

• Business owners over 45 looking to substantially increase their retirement savings in the coming years

• Highly-profitable companies

• Business owners wanting to contribute more than the traditional 401(k) limits to their retirement while accruing substantial tax savings

For Americans earning over $400,000 per year, cash balance plans are a game-changer. With the potential for hundreds of thousands of dollars in annual tax savings, a closer look is well worth the time.

How do Cash Balance Plans differ from 401(k) plans?

Cash Balance Plans are defined benefit plans. In contrast, 401(k) plans are a defined contribution plan. There are four major differences between typical Cash Balance Plans and 401(k) plans:

  1. Participation – Participation in typical Cash Balance Plans generally does not depend on the workers contributing part of their compensation to the plan; however, participation in a 401(k) plan does depend, in whole or in part, on an employee choosing to make a contribution to the plan.
  2. Investment Risks – The employer or an investment manager appointed by the employer manages the investments of cash balance plans. Increases or decreases in plan values do not directly affect the benefit amounts promised to participants. By contrast, 401(k) plans often permit participants to direct their own investments and bear the investment risk of loss.
  3. Life Annuities – Unlike 401(k) plans, Cash Balance Plans are required to offer employees the choice to receive their benefits in the form of lifetime annuities.
  4. Federal Guarantee – Since they are defined benefit plans, the benefits promised by Cash Balance Plans are usually insured by a federal agency, the Pension Benefit Guaranty Corporation (PBGC). If a defined benefit plan is terminated with insufficient funds to pay all promised benefits, the PBGC has authority to assume trusteeship of the plan and begin to pay pension benefits up to the limits set by law. Defined contribution plans, including 401(k) plans, are not insured by the PBGC.

For more information, please contact us.

 

Pension Protection Act of 2006

The Pension Protection Act of 2006 (PPA) is long and hard to read, but it played a crucial role in establishing cash balance plans as a viable and legally recognized retirement savings option. Before 2006, cash balance plans faced frequent legal challenges. Those bringing the suits argued that cash balance plans violated established rules for benefit accrual and discriminated against older workers. The rulings on these cases were inconsistent, and many business owners were reluctant to risk establishing a plan that just didn’t have firm legal footing.

The Pension Protection Act ended this uncertainty about the legality of cash balance plans. The legislation set specific requirements for cash balance plans, including:

  • A vesting requirement: Any employee who has worked for their company for at least three years must be 100% vested in their accrued benefits from employer contributions.
  • A change in the calculation of lump sum payments: Participants in a cash balance plan can usually choose to receive a lump sum upon retirement or upon the termination of employment instead of receiving their money as a lifetime annuity. Before 2006, some plans used one interest rate to calculate out the anticipated account balance upon retirement, but, when participants opted to receive an earlier lump sum, the plan called for using a different interest rate to discount the anticipated retirement balance back to the date of the lump sum payment. This could lead to discrepancies between the hypothetical balance of the account (as determined by employer contributions and accumulated interest credits) and the actual lump sum payout, an effect known as “whipsaw”. The PPA eliminated the whipsaw effect by allowing the lump sum payout to simply equal the hypothetical account balance.
  • Clarification on age discrimination claims: A cash balance plan does not violate age discrimination legislation if the account balance of an older employee is compared with that of a similarly situated younger employee (i.e. with the same length of employment, pay, job title, date of hire, and work history), and the older employee’s balance is equal to or greater than the younger employee’s.

There are, of course, many other points included in this lengthy piece of legislation, but the takeaway is this: the Pension Protection Act of 2006 removed the legal uncertainty surrounding cash balance plans and made them a much more appealing option for small business owners.

At the end of 2016, the number of cash balance plans in America more than tripled after the implementation of the PPA.  Additional regulations in 2010 and 2014 made these hybrid plans an even better option, and we anticipate that their popularity will continue to grow. There are thousands of high-earning business owners out there who can reap huge, tax-crushing benefits from implementing cash balance plan – they just have to know about them first.

Cash Balance Plans

Source: Ascensus Consulting, Inc.

More professional practices (and practice groups) should look into Cash Balance Plans.

In corporate America, pension plans are fading away: 59% of Fortune 500 companies offered them to new hires in 1998, but by 2015, only 20% did. In contrast, some legal, medical, accounting, and engineering firms are keeping the spirit of the traditional pension plan alive by adopting cash balance plans.

Owners and partners of these highly profitable businesses sometimes get a late start on retirement planning. Cash balance plans give them a chance to catch up.

Contributions to these defined benefit plans are age dependent – the older you are, the more you can potentially sock away each year for retirement. In 2016, a 55-year-old could defer as much as $180,000 a year into a cash balance plan; a 65-year-old, as much as $245,000.

These plans are not for every business as they demand consistent contributions from the plan sponsor. Yet, they may prove less expensive to a company than a classic pension plan, and offer significantly greater funding flexibility and employee benefits compared to a defined contribution plan, such as a 401(k).

How does a cash balance plan differ from a traditional pension plan?  In a cash balance plan, a business or professional practice maintains an account for each employee with a hypothetical “balance” of pay credits (i.e., employer contributions) plus interest credits. There can be no discrimination in favor of partners, executives, or older employees; the owner(s) have to be able to make contributions for other employees as well. The plan pays out a pension-style monthly income stream to the participant at retirement – either a set dollar amount or a percentage of compensation. Lump-sum payouts are also an option.

Each year, a plan participant receives a pay credit equaling 5-8% of his or her compensation, augmented by an interest credit commonly linked to the performance of an equity index or the yield of the 30-year Treasury (the investment credit can be variable or fixed).

Cash balance plans are commonly portable: the vested portion of the account balance can be paid out if an employee leaves before a retirement date.

As an example of how credits are accrued, let’s say an employee named Joe earns $75,000 annually at the XYZ Group. He participates in a cash balance plan that provides a 5% annual salary credit and a 5% annual interest credit once there is a balance. Joe’s first-year pay credit would be $3,750 with no interest credit as there was no balance in his hypothetical account at the start of his first year of participation. For year two (assuming no raises), Joe would get another $3,750 pay credit and an interest credit of $3,750 x 5% = $187.50. So, at the end of two years of participation, his hypothetical account would have a balance of $7,687.50.

An employer takes on considerable responsibility with a cash balance plan.  It must make annual contributions to the plan, and an actuary must determine the minimum yearly contribution to keep the plan appropriately funded. The employer effectively assumes the investment risk, not the employee. For example, if the plan says it will award participants a fixed 5% interest credit each year, and asset performance does not generate that large a credit, the employer may have to contribute more to the plan to fulfill its promise. The employer and the financial professional consulting the employer about the plan determine the investment choices, which usually lean conservative.

Employer contributions to the plan for a given tax year must be made by the federal income tax deadline for that year (plus extensions). Funding the plan before the end of a calendar year is fine; the employer just needs to understand that any overage will represent contributions not tax-deductible. The plan must cover at least 50 employees or 40% of the firm’s workforce.

Cash balance plans typically cost a company between $2,000-5,000 to create and between $2,000-10,000 per year to run. That may seem expensive, but a cash balance plan offers owners the potential to keep excess profits earned above the annual interest credit owed to employees. Another perk is that cash balance plans can be used in tandem with 401(k) plans.

These plans can be structured to reward owners appropriately. When a traditional defined benefit plan uses a safe harbor formula, rank-and-file employees may be rewarded more than owners and executives would prefer. Cash balance plan formulas can remedy this situation.

Benefit allocations are based on career average pay, not just “the best years.”  In a traditional defined benefit plan, the eventual benefit is based on a 3- to 5-year average of peak employee compensation multiplied by years of service. In a cash balance plan, the benefit is determined using an average of all years of compensation.

Cash balance plans are less sensitive to interest rates than old-school pension plans. As rates rise and fall, liabilities in a traditional pension plan fluctuate. This opens a door to either over-funding or under-funding (and under-funding is a major risk right now with such low interest rates). By contrast, a cash balance plan has relatively minor variations in liability valuation.

A cash balance plan cannot be administered with any degree of absentmindedness. It must pass yearly non-discrimination tests; it must be submitted for IRS approval every five years instead of every six. Obviously, a plan document must be drawn up and periodically amended, and there are the usual annual reporting requirements.5

Ideally, a cash balance plan is run by highly compensated employees (“HCE”s) of a firm who are within their prime earning years. Regarding non-discrimination, a company should try to aim for at least a 5:1 ratio – there should at least be 1 HCE plan participant for every 5 other plan participants. In the best-case scenario for non-discrimination testing, the HCEs are 10-15 years older than half (or more) of the company’s workers.

If a worst-case scenario occurs and a company founders, cash balance plan participants have a degree of protection for their balances. Their benefits are insured up to their maximum value by the Pension Benefit Guaranty Corporation (PBGC). If a cash balance plan is terminated, plan participants can receive their balances as a lump sum, roll the money over into an IRA, or request that the plan sponsor transfer its liability to an insurer (with the pension benefits paid to the plan participant via an insurance contract).

Cash balance plans have grown increasingly popular. Some businesses have even adopted dual profit-sharing and cash balance plans. Maybe it is time for your business to look into this intriguing alternative to the traditional pension plan.