With actual return crediting, the interest credit each year is the rate of return on the plan's own investments. If the plan's brokerage account gains 8%, your account in the plan is credited 8%. If it loses 5%, your account loses 5%. The method is permitted by Treas. Reg. 1.411(b)(5)-1(d)(5)(ii).
Its appeal in a one-person plan is that the account on paper tracks the money actually in the plan. With a fixed crediting rate, investments that beat the rate leave the plan holding more than it owes you, and returns that fall short leave a gap the business has to fill. When the credit is the actual return, the two move together.
Two conditions come with it:
- The plan's investments must be diversified so as to minimize the volatility of returns. A single stock, a single sector or cryptocurrency would not meet that standard.
- When the benefit is paid, it cannot be less than the total of the pay credits made to your account. This is the preservation of capital rule, and if losses leave the account below that total, the business contributes the difference.
Returns also move future contributions. Strong years leave less room under the 415(b) limit, and weak years can raise the minimum required contribution. As trustee, you choose the investments. See investing cash balance plan assets.