Defined Benefit Plan & Cash Balance Plan Investment Options: What You Need to Know

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When it comes to defined benefit plan investment options you really can do almost anything you want. But just because you can do anything you want doesn’t mean you really should?

This video details many of the investment options that are available to cash balance plans and defined benefit plans. These plans have an assumed interest crediting rate of approximately 5%. As such you want to keep your investment returns in theory close to that range. That usually will restrict you to stocks bonds and other types of Qualified investments.

But she really have a wide variety of options. In fact you could invest in real estate, cryptocurrency, private notes, and hard money loans. Some people in fact will do crowdfunding and private equity.

But the problem with some of these self-directed and non-qualified assets is that they can have extremely volatile returns. Any investments with volatile returns will lead to volatile contribution amounts. For example if you have a very high asset return it will likely reduce your plan contributions. This can be a big problem if you have high taxable income and are looking for a large contribution in the given year.

Conversely if you have a low investment return it will increase your contribution levels. This might sound great if you’re in a higher tax bracket, but if it is a lower profit year for you you may not want to make these larger contributions.

The moral of the story is try to keep your investment returns low to moderate and with minimal volatility. Any risky investments should be done in defined contribution plans like 401(k)s steps and IRAs. Because these plans don’t have a desired benefit you can invest in them with almost an unlimited amount of return.

So when examining defined benefit plan investment options make sure that you look at your overall portfolio. Keep your riskier asset classes in defined contribution plans and keep your moderate to conservative portfolio in defined benefit plans.

Consistent investment returns will lead to consistent funding levels. This adds a greater amount of predictability to the plan contributions which can improve your overall tax savings.

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