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everyone sleeps upon syndicated Financial Congress that money color commentary on today's show profit sharing and cash balance plans part four in our series on tax avenged retirement lands with a retirement expert Jodi Daly welcome to the fourth segment Jodi I should say total I mean bowing down to your prowess in these regards I mean you are really a gun in when we talk about qualify plan you've been in this thing 30-something years right I mean we're talking some serious time and you know this stuff code you deal with this every day now most of our people watching our show we're gonna go t I know for Olin case I know IRAs I might even know Roth but I don't know if I know what a profit sharing plan is or a cash balance plan give me a little bit of definition on both and then I'll start asking you questions on the basis of your answer okay well profit sharing plan is a defined contribution plan that really provides a contribution generally on a discretionary basis by the employer based on net profits or based on other criteria that they may decide at the end of the year to make it's generally a compensation based formula where they say we're gonna give every employee a 5% of pay profit sharing contribution because we had a good year it's typically determined after the end of the tax year we can change the view they can change it every year in some cases it's hardwired into the document in most cases profit sharing contributions are discretionary there are different forms of profit sharing plans that you know different for new comparability other types of design features that you can put into profit sharing plans now I got that to find benefit plan that's what a profit spring plan is and it's one of the few plans that can take life insurance so correct correct all right cash balance plan what's that cash balance plan is actually a defined benefit plan and it is a it's a it's called a hybrid plan but it really is a defined benefit plan where it's determining the amount that's being contributed to an employee based on a formula it might be a flat dollar amount it might be a percent of pay why can't you just do a straight out defined benefit plan well it's it's a why is it different a cash balance plan is a little bit simpler to understand than a defined benefit plan particularly for participants because they actually see their accumulated account balance employer but they might say they're gonna make a 1% of pay contribution to you you know they make a $500 annual contribution you see that go into your account and it grows with earnings or with interests credits so it's easier for a participant to understand that then accruing a benefit in a defined benefit plan ok so if I'm if I'm making a decision on a defined benefit plan if I'm comparing to find benefit plan to a defined benefit plan cash you know cash balance plan well from an employee or a point of view I might want to look at this cash balance but it's a lot more difficult it sounds like it's more fully disclosed to the employee it's it well they're both disclosed they're just easier to understand the cash balances easier understand it looks more like a 401k plan as far as in terms of what participants see on statements and what they what they see but it is a defined benefit okay you know and your profit sharing is also a defined benefit or is it defined contributions all right so I'm looking at these two theirs are not as note and these are not as well known in the public's eye so if I'm an employer today I'm watching this show and I'm thinking well there is it there's a very difference I'd never heard I when I hear defined benefit is a profit sharing plan for me and you have criteria for that here's what you'd want to look characteristics that you'd make your decision the other one would all instead of doing a traditional defined benefit plan sounds like the cash balance plans are easy to understand are they easier to administrate they're they are slightly easier you're still there is still an actuarial calculation involved in defined benefit in cash balance contributions if I'm looking at the yin and yang the pros and cons of a profit sharing plan what are the negatives kind of gave me the positives what are the negatives from an employer point of view you know that's a tough question because I don't really think that there's ever a negative when you're providing a benefit to your employees but you know sometimes internally there can be if you're making a contribution and it's determined based on an employee's contribution to the company politically some employees may think well I I did more than Steve why is he getting a contribution to the profit sharing plan in the same percentage of pay that I'm getting so politically sometimes there may be that kind of thing profit sharing contributions are generally discretionary so that's a good thing that's not a bad thing if employer has a bad year they don't need to make that contribution so I you know there's not really a lot of cons and a straight profit sharing plan can you combine trying to get the best of both worlds here can I have actually introduced into my company a profit sharing plan defined contribution and I cash balance plan to find benefit completely so so are there ways to if I already am I for one Kate could I keep that and still introduce these two yeah and actually in in in many cases profit sharing provisions are already part part of your 401k plan there that's a feature in the adoption agreement that you can just check off and say I want to include profit sharing in the plan dot at the beginning if you didn't have that on there it's in your dock you just didn't do it but you could execute it and say hey you know we're doing alright I'd like to get profit sharing to my people okay so you're gonna have these ten how do they pretty you sound like you like the tandem ability of having the defined contribution Oh having a profit sharing plan on the contribution site and a benefit plan on the other side using of cash balance you like that we really believe in pairing plans or layering plans one on top of the other to provide additional benefits typically plans are tested together in that environment it require some form of contributions across both plans but they can be really beneficial and there's way to tier benefits to certain groups of employees and there's a lot of flexibility in the design of them did I just hear you see is that when you say tiered benefits is that is that code for disagree I could be discriminatory you can I wouldn't say discriminate this is the right word but yes you can you can define certain groups to receive certain types of contributions in the plans yes okay so could I separate blue collar from white collar would that be one distinction you can do it in certain ways yeah it might be by job title by classification those titles manager oh absolutely and and that's you know one of the advantages of those those types of plans is that you can start to kind of pick and choose the groups of employees that you want to benefit any regulatory issues on this I'm sure well there is testing you still have to test the benefits okay now let's say I'm I did I went through the test I did it I unlike the adoption of both I got a contribution and a defined benefit plan together and I'm keeping my original 401k do you see anybody adding additional ERISA plans beyond 401k profit sharing and cash balance absolutely there's more there is more there's there is a a very kind of top-notch sophisticated defined benefit plan that we're doing a lot of these days called a benefit focus to find better and we're gonna talk about that next segment so keep your hold on that so what I keep thinking and I think I think I'm typical I think most employers and entrepreneurs that have people working for them are watching this show going I did not rely thought it was 401k and that's all you're in I didn't know you could add profit share I didn't know you can do cash balance plan I didn't know you could have a safe harbor 401k all in the same time and then we're going to talk in the fifth segment on something even much more I would say eclectic and somewhat sophisticated so these are all there and options for retirement for an employer he's looking at this what's the benefits of the company and himself as the shareholder but he's also looking at this is I need this as a retention to all thirds he keep my good employees and my rainmakers right and also a way to recruit from other companies over to my company absolutely okay now and you're in your mind how many multiple plans I'm just curious now how many multiple plans when you deal with all the people you've known the last 30 years how many have more than just one plan they have not only a 401k but they have all these additional oh we see them all the time they're all so you're saying Americans are doing multiple companies doing multiple places particularly companies that are profitable that are looking for additional contributions more than they can get in to find contribution plans we're seeing a lot of paired plans these days now in earlier you said that there was an increase in defined benefit plans and some of this might be due to the flexibility of profit sharing plans I mean you said you could even adopt life insurance into it so is you seeing any of that well yeah and cash balance plans is a defined contribution plants that we're seeing an increase in the addition of those into businesses is this if I'm an employer today and I'm saying boy you know you guys are exciting me but how much hassles it's a lot of admin work here can i farm all this out it really from an employer standpoint our job is to make it as easy as possible on the employer so we'd like to take all those responsibilities on the administration your file about 5,500 everything you're doing at all absolutely and you're ok with doing it all yes would you say most of your employee employers are outsourcing it to you they're not keeping anything in else in most case it's the only thing that they really need to do is provide payroll data and census data and that type of thing but for the most part you know they want they don't want this is not what they do in their business day-to-day know what they wanted to do yeah ok I understand listen don't forget to watch our next segment on benefit focus to find benefit plans part 5 in our series on tax advantage retirement plans and keep in mind before moving forward any of the ideas on the show always check with your tax consultant legal counsel financial advisor you've been watching see salons money [Music] you