Fixing an Underfunded Cash Balance Plan Mid-Year Hypothetical Case Study

Plan Profile (Typical Physician Group)

  • 1 owner physician, age 55
  • Target CB contribution: $400,000/year
  • Plan assets (January 1): $2,400,000
  • Funding status (starting): FTAP/AFTAP ≈ 78% (Restricted)
  • Investment allocation: 60/40 portfolio

 

Scenario A — Stay with 5% Fixed Interest Crediting (FIC)

Assumptions:

  • Crediting rate: 5% fixed
  • Actual portfolio return year end: –8%
  • Planned contribution: $400,000 (target)

 

What Happens

  1. Assets vs. Liabilities Disconnect
  • Assets decline: –8%
  • Liabilities still grow: +5%
  •  Funding gap widens quickly

 

  1. End of Year Results
Metric Result
Ending Assets ~$2,568,000
Funding Target ~$3,360,000
FTAP ~76% (Restricted)

 

  1. Real-World Consequences
  •  Required contribution increases (true-up likely)
  • Potential minimum funding deficiency risk under IRC Section 430
  • AFTAP trending toward restriction zones under IRC Section 436
  • You lose control of your cash flow

 

Scenario B — Add Market Return Crediting (MRC) Mid-Year (July 1)

Assumptions:

  • Jan–June: 5% FIC
  • July–Dec: Market Return Crediting (–8%)
  • Contribution: $400,000

 

What Happens

  1. Assets and Liabilities Move Together
  • Assets: –8%
  • Liabilities: blended ≈ ~(–1% to +1%)
  • Funding stabilizes instead of deteriorating

 

  1. End of Year Results
Metric Result
Ending Assets ~$2,568,000
Funding Target ~$2,950,000
FTAP ~87% (At-Risk but in a manageable range and stabilizing)

 

  1. Real-World Consequences
  • Avoids large true-up contribution
  • Reduces risk of benefit restrictions
  • Keeps plan in operational control zone
  • Stabilizes required contributions going forward
  • You regain control of your cash flow

 

Side-by-Side Comparison

Metric FIC (Do Nothing) MRC (Mid-Year Fix)
Contribution $400,000 → likely higher required 🔴 $400,000 (stable) 🟢
Ending FTAP 76% 🔴 87% 🟢
Funding Direction Worsening Stabilizing
True-Up Risk ❌ High ✅ Reduced
IRC 436 Restrictions ❌ Likely risk ✅ Avoided

Additional Considerations

Fixed Interest Crediting May Be More Appropriate When:

  • Short-duration plans that are approaching termination
  • Sponsors with very low risk tolerance or preference for contribution smoothing via fixed assumptions
  • Situations where administrative simplicity outweighs funding efficiency

 

Limitations/Risks for Market Return Crediting:

  • Increased variability in credited interest year-to-year
  • Need for proper investment alignment and fiduciary oversight
  • Potential communication complexity with participants

 

While Market Return Crediting can improve alignment between assets and liabilities in many modern plan designs, the appropriate strategy is highly dependent on the sponsor’s objectives, time horizon, and risk tolerance, and should be evaluated on a case-by-case basis.

 

Key Insight

Underfunding is not caused by bad markets.

It’s caused by crediting the wrong rate to liabilities.

  • FIC forces liabilities up when assets go down
  • MRC lets liabilities adjust with reality

 

Why Timing Matters

  • Before ~1,000 hours (mid-year) → Fixed
  • After that → You’re locked into:
    • Required catch-up contributions
    • Potential funding deficiency penalties

 

Bottom Line

  • FIC amplifies losses into funding crises
  • MRC absorbs volatility and protects cash flow
  • Mid-year action is the difference between:
    • Writing a planned check
    • Writing a forced check
  • If July 1 has passed, amend your plan by December 31 to switch to MRC effective January 1 for the following year

 

Call to Action

Most underfunded CB plans aren’t suffering from poor investment performance—they’re suffering from outdated plan design.

We provide a Cash Balance Funding Risk Review that shows:

  • Whether your plan is heading toward a forced contribution or restriction trigger
  • Your projected AFTAP under current design
  • How adding Market Return Crediting before mid-year can stabilize funding

OUR MISSION, YOUR RETIREMENT OPTIMIZATION PROTOCOL

Patrick Wallace, MBA, CFP®

ERISA 3(21) Investment Advisor Fiduciary
Physicians Pension Fiduciary
817-385-7868