CASE STUDY: $8.5 Million In and Still Underfunded?

How One Doctor’s Cash Balance Plan Went Completely Off the Rails

 

Introduction

This case study is not hypothetical.

It is a real cash balance plan reconstructed entirely from publicly filed Form 5500 data.

What it shows clearly and uncomfortably is how a plan can unravel over time when design, oversight, and asset management are misaligned.

The plan sponsor, a physician who also served as plan administrator and self-directed asset manager, operated a traditional 5% fixed interest crediting (FIC) design. Over multiple years, the plan experienced significant market losses, followed by increasingly large and reactive “true-up” contributions to try to restore funding levels.

After 10 years, the results are stark:

• Total Contributions: $8,524,054
• Ending Plan Assets: $4,586,338
• Current Status: Still underfunded
• Immediate Requirement: ~$1,250,000 additional contribution

This is not volatility. This is structural failure.

Despite substantial contributions, the plan never achieved stable funding. Instead, it cycled through periods of overfunding followed by severe underfunding, ultimately requiring eye-watering cash infusions just to stay compliant.

The core issue was not just market performance it was a complete breakdown in coordinated oversight.

• The actuary failed to identify and correct a design that was fundamentally mismatched to the assets.
• The CPA failed to recognize the growing funding inefficiency and escalating risk exposure.
• The plan sponsor, acting as his own investment manager, assumed a level of control that cash balance plans are simply not designed to accommodate.

The result is a textbook example of what happens when a defined benefit plan is treated like a discretionary investment account.

 

Bottom line:

Cash balance plans are precision instruments governed by strict funding mechanics. When they are run without coordinated expertise and especially when managed as a DIY investment strategy, they can quickly turn from a powerful tax optimization tool into a capital drain with compounding risk.

 

 

Cash Balance Plan Funding Summary (2015 – 2024)

Plan Year	Plan Assets Jan 1	Total Funding Target	FTAP*	AFTAP**	Contributions	Actual Return	Plan Assets Dec 31
1/1/2024	$3,336,338	$4,107,564	59.82%	80.00%	$1,250,000	0.00%	$4,586,338
1/1/2023	$2,586,338	$4,107,564	53.36%	62.54%	$750,000	0.00%	$3,336,338
1/1/2022	$2,466,895	$3,332,095	47.51%	62.61%	$680,000	-18.73%	$2,586,338
1/1/2021	$1,587,022	$2,645,120	66.02%	80.74%	$650,000	16.23%	$2,466,895
1/1/2020	$1,999,394	$2,121,496	17.65%	60.00%	$1,210,000	-86.67%	$1,587,022
1/1/2019	$2,301,991	$1,697,060	39.05%	97.73%	$1,330,000	-74.03%	$1,999,394
1/1/2018	$2,385,786	$1,208,136	80.00%	151.86%	$717,500	-30.54%	$2,301,991
1/1/2017	$1,388,193	$760,441	93.56%	226.96%	$865,100	8.36%	$2,385,786
1/1/2016	$792,655	$462,528	82.15%	110.79%	$601,024	-0.50%	$1,388,193
1/1/2015	$318,668	$203,442	84.63%	40.97%	$470,430	0.62%	$792,755

* Funding Target Attainment Percentage

** Adjusted Funding Target Attainment Percentage

 

 

Cash Balance Plan Year-by-Year Analysis (2015–2024)

2015 — Weak Foundation

• FTAP/AFTAP: 84.63% / 40.97%
• Status: Underfunded (severe AFTAP restriction zone)
• Return: 0.62%
• Observation: Plan starts underfunded from inception.
• Interpretation: Contributions were insufficient relative to promised benefits.
• Key Risk: Early AFTAP <60% → restriction risk immediately introduced.

2016 — Temporary Improvement

• FTAP/AFTAP: 82.15% / 110.79%
• Status: Mixed (FTAP underfunded / AFTAP overfunded)
• Return: -0.50%
• Observation: AFTAP improves due to contribution timing, not structural fix.
• Interpretation: This is timing noise, not true funding health.

2017 — Artificial Overfunding Signal

• FTAP/AFTAP: 93.56% / 226.96%
• Status: Overfunded (AFTAP distortion)
• Return: 8.36%
• Observation: Extremely high AFTAP vs sub-100% FTAP.
• Critical Insight: This is a measurement distortion, not real overfunding.
• Root Issue: Liability measurement vs asset timing mismatch.

2018 — Instability Emerges

• FTAP/AFTAP: 80.00% / 151.86%
• Status: Borderline underfunded (FTAP), overfunded (AFTAP)
• Return: -30.54% (not a typo)
• Observation: Large negative return introduces volatility.
• Interpretation: Plan is highly sensitive to market swings.

2019 — Structural Breakdown Begins

• FTAP/AFTAP: 39.05% / 97.73%
• Status: Critically Underfunded (FTAP <60%)
• Return: -74.03% (not a typo)
• Contribution: $1,330,000
• Observation: Massive loss forces large “true-up” contribution.
• Key Insight:
  • Even large contributions fail to restore funding
  • Plan enters reactive funding cycle

2020 — Extreme Dislocation

• FTAP/AFTAP: 17.65% / 60.00%
• Status: Severe Underfunded (floor level)
• Return: -86.67% (not a typo)
• Contribution: $1,210,000
• Observation: Catastrophic asset decline forces an even larger “true-up” contribution.
• Interpretation:
  • Plan is now completely disconnected from liability structure
  • Contributions becoming unsustainably large

2021 — Partial Recovery (But Still Broken)

• FTAP/AFTAP: 66.02% / 80.74%
• Status: Underfunded (restriction zone)
• Return: 16.23%
• Observation: Market rebound helps but does not fix the problem.
• Key Insight: Recovery years do not restore equilibrium.

2022 — Backward Movement

• FTAP/AFTAP: 47.51% / 62.61%
• Status: Critically Underfunded
• Return: -18.73%
• Contribution: $680,000
• Observation: Funding deteriorates again.
• Interpretation:
  • Contributions reduced too early
  • Plan remains fragile and unstable

2023 — Continued Strain

• FTAP/AFTAP: 53.36% / 62.54%
• Status: Underfunded
• Return: 0.00%
• Contribution: $750,000
• Observation: Contributions increasing again to compensate.
• Pattern: Reactive contributions chasing prior losses.

2024 — Another Massive True-Up Required

• FTAP/AFTAP: 59.82% / 80.00%
• Status: Underfunded (near critical threshold)
• Contribution: $1,250,000
• Observation: Second largest required contribution in plan history.
• Critical Insight:
  • After 10 years and $8.5M+ contributions, plan is still underfunded
  • Indicates complete structural failure

 

Macro Diagnosis (What’s Actually Happening)

1. This is NOT a Return Problem

Yes, returns were bad, very bad.

But:

• The plan never stabilizes even in recovery years
• Contributions fail to create durable funding improvement
• This is a design failure amplified by volatility

 

2. Classic Underfunded FIC Trap

This plan exhibits all failure characteristics:

• Fixed 5% liability growth
• Volatile market assets
• No alignment mechanism
• Result: Losses → massive contributions → temporary recovery → repeat

 

3. Contribution Pattern = Reactive, Not Strategic

• Contributions spike AFTER losses
• No forward-looking funding discipline
• Creates:
  • Cash flow strain
  • Tax planning inefficiency
  • Sponsor fatigue

 

4. Regulatory Risk is Persistent

• Multiple years below 60% FTAP
• Ongoing exposure to:
  • Benefit restrictions
  • Lump sum limitations
  • Required minimum contributions

 

What Should Have Happened: Market Return Crediting (MRC) Comparison

This plan did not fail because of market volatility—it failed because the crediting structure (5% FIC) was disconnected from actual asset performance.

A properly designed plan using Market Return Crediting (MRC) could have fundamentally changed the outcome:

 

1. Liability Growth Could Have Matched Asset Performance

• Instead of a fixed 5% liability increase each year
• Benefits could adjust based on actual portfolio returns

• Result:
  • No structural mismatch between assets and liabilities
  • Loss years reduce liabilities → preventing funding gaps
  • Gain years increase liabilities → preventing overfunding

 

2. Contribution Volatility Could Have Been Eliminated

Under FIC (what actually happened):

• Large losses → massive “true-up” contributions
• Recovery years → no lasting improvement

Under MRC:

• Contributions remain stable and predictable
• No reactive spikes after market declines

Result:

• Avoid multiple $1M+ contribution shocks
• Improved cash flow planning
• Consistent tax strategy

 

3. Funding Ratio Could Have Stayed in a Controlled Range

Instead of:

• Falling below 60% FTAP multiple times
• Triggering restrictions and funding stress

MRC could have maintained:

• FTAP/AFTAP consistently in the 95%–110% range

Result:

• No benefit restrictions
• No emergency funding requirements
• No regulatory pressure

 

4. Total Contributions Could Have Been Significantly Lower

Actual outcome:

• $8.5M+ contributed
• Still underfunded

Under MRC:

• Contributions aligned with real economic performance
• No need to “chase losses”

Result:

• Lower cumulative contributions
• Higher efficiency per dollar contributed
• Better long-term tax optimization

 

5. The Plan Could Have Functioned as Intended

Instead of:

• A volatile, reactive funding vehicle

The plan could have been:

• A stable, predictable tax-deferral strategy

 

Conclusion

With MRC, this plan could not have required extreme contributions to fix past losses because the losses could have been absorbed structurally.

That is the difference between:

• Managing a problem (FIC)
  vs.
• Designing it out entirely (MRC)

 

Call to Action

If your Cash Balance Plan looks anything like this, it’s not a market problem, it’s a design problem.

Before the next funding deadline locks in another year of inefficiency, get a Cash Balance Funding Risk Review.

We’ll identify:

• Hidden overfunding or underfunding risks
• Required vs. avoidable contributions
• Structural fixes to stabilize funding and maximize deductions

Schedule a 30-minute review to see exactly how your plan is performing—and what it should be doing instead.