WSJ Your Money Briefing - How Wealthy Americans Use Cash Balance Plans to Save Millions for Retirement

Episode Date: March 11, 2025

Cash balance retirement plans have surged in popularity and now hold $1 trillion of wealth. Wall Street Journal reporter Anne Tergesen joins host Ariana Aspuru to discuss how the plans work and explain how affluent professionals are amassing multimillion-dollar retirement account balances. Sign up for the WSJ's free Markets A.M. newsletter.  Learn more about your ad choices. Visit megaphone.fm/adchoices

TD Direct Investing offers live support. So whether you're a newbie or a seasoned pro, you can make your investing steps count. And if you're like me and think a TFSA stands for Total Fund Savings Adventure, maybe reach out to TD Direct Investing. Here's your money briefing for Tuesday, March 11th. I'm Mariana Aspuru for The Wall Street Journal.

On top of their 401k plans, many lawyers, doctors and accountants also have another retirement savings option. It's called a cash balance plan. This offers them the ability to sort of tack on this extra plan and put a whole lot of money into it and leave with as much as three and a half million dollars. We'll hear from Wall Street Journal reporter Ann Turgeson about how they're using these plans to build wealth after the break. Hey guys, back at the playground again, huh? Yep.

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Wait! Did we just invent California? Discover why California is the ultimate playground at visitcalifornia.com High earners may have a secret weapon for saving millions for retirement. Cash balance plans. Wall Street Journal reporter Anne Turgison joins me. Anne, what's the biggest difference between a cash balance plan and another retirement plan like a 401k?

So cash balance plans are technically pension plans. So you can think of them that way. They are structured a little differently than traditional pensions that everybody's familiar with, but the difference really is that with a traditional pension, you're paid a monthly income. With a cash balance plan, most people save a lump sum amount, similar to what you would do in a 401k. How are contribution limits different in cash balance plans?

With a 401k, there's an annual amount that you're able to save. And if your balance goes to $200 million, that's fine. Nobody's capping the balance. With a cash balance plan, they cap the balance. So you're able to save up to, it depends on your age and your income but it's about three and a half million dollars for most people. How do the taxes work with these accounts? It's the same as 401k's. You put the money in on a tax deferred basis and you take them out in retirement and you pay tax at that point income tax.

And what is the return on a cash balance plan look like? It's similar to a pension so it's up to the employer. The employer makes the decisions about how to invest the money, and typically they target a set return. And it's usually not that high. It's usually somewhere in like the 4% or 5% range. So for people who have these plans, what typically happens is that after some number of years,

if the person leaves of years, if the person leaves their job or if the company terminates the plan, everybody gets to take their savings and they roll them over to an IRA and then they can invest for like higher growth than what the plan is offering. How does this fit into someone's existing retirement portfolio? It's in addition to a 401k and it's really caught on and become very popular with a lot of smaller businesses, especially those where you've got like business owners or partners who are paid a percentage of the profits and they want to save more than they can in a

401k. This offers them the ability to sort of tack on this extra plan and put a whole lot of money into it and leave with as much as three and a half million dollars that they can kind of roll into an IRA. What's the benefit of a cash balance plan versus a pension? These plans are structured differently and they're very complicated but as a gross generalization say a company has a couple partners who are in their 50s who maybe they got a late start with saving for retirement,

they look at a cash balance plan, they see an opportunity to catch up. So maybe they're putting away $100,000 a year, right, into the cash balance plan on top of what they're already saving in the 401k. But if you're earning $50,000 a year, you're going to get, say, five to seven and a half percent, whether you contribute or not in your 401k versus an owner who's putting away $100,000, $200,000, $300,000. So it's not that the employees receive the same contributions as the owners, but they do get a benefit. And having five or seven and a half percent of your pay put into your account whether you contribute or not is actually

quite nice. Most 401k plans offer a matching contribution, but you have to put money in to get that. These plans are very popular with law firms, medical practices, and similar professional services companies. So take doctors, for example. That's sort of the most dramatic example. It's quite common that first they go to medical school, then they have to medical school, then they

have to do residencies, fellowships. They're often working in a fairly low paid capacity for a while after they have gone to medical school. Many of them take on huge amounts of student loan debt. So when they finally get established in a practice, maybe they're in their mid thirties, maybe they have children. So all of a sudden, they're just behind. They have not really been able to put away a lot of money into a 401k, if any money at all. So sometimes by the time they start to make some significant amount of money,

they might even just be in their 40s, and then all of a sudden, some of them have college on the horizon for their children. So some people, even in their 50s, are quite behind where they would have been if they had saved in their 20s and 30s, as other workers do. So this is where the cash balance plan can come in really handy for people

like that who need to catch up. What are the downsides to a cash balance plan? Well, for employers, they can be complicated to set up. They're more expensive than a 401k, typically, to administer. And then as with regular pensions, if a cash balance plan is structured, for example, to offer a 5% return every year, if the investments don't pan out to offer that 5%, then the employer might have to put in some extra money somewhere along the line. Ultimately, it's the company employer obligation to make good on the promise that's made to the participants in this plan. So it's got that as well as a downside.

For someone whose employer offers this, what kinds of questions should they ask themselves before they sign up for it? For people, it's pretty clear, right? You're a doctor, you're 50 years old, you haven't saved nearly what you feel you need to save. In that case, it could really make a lot of sense. If you're earning enough money and you can come up with a contribution level that like first of all, will very nicely

save you on income taxes, but it's only if you can forego the income. It's really not coming out of the company, it's ultimately coming out of your paycheck so you have to decide whether that's affordable to you or not and often it's a multi-year prospect. Typically these plans are designed to stay in effect for five to ten years so you have to think can I afford to do this year after year for however long this plan is going to be around? That's WSJ Reporter Anne Turkisen. And that's it for your money briefing. This episode was produced by Zoe Kolkin with supervising producer Melanie Roy.

I'm Marianna Aspuru for The Wall Street Journal. Thanks for listening.