Who chooses the investments
A cash balance plan holds its money in a trust, separate from the business and from you. For a one-person plan, the owner is usually the trustee: the person who opens the plan's brokerage account, decides what it holds, and is the only one who can move money in or out of it. The account is opened under the plan's own tax ID, not the business's.
Nobody else chooses for you. A plan provider prepares documents and calculations but does not direct the account. Maxed does not give investment advice, does not recommend any investment and has no access to the account.
How actual return crediting works
Every year your plan account gets a pay credit, set by the plan's formula, and an interest credit. The plan document fixes how the interest credit is worked out. A common choice for solo plans is actual return crediting: the interest credit equals the return the plan's investments actually earned that year, allowed under Treas. Reg. 1.411(b)(5)-1(d)(5)(ii).
In a year the investments gain 7%, your account is credited with 7%. In a year they lose 10%, your account loses 10%. Because the account follows the assets, your account balance and the money in the plan tend to stay close together.
The alternative is a fixed or index-based rate. The regulations allow a fixed rate of up to 6%, or rates tied to Treasury yields or the IRS segment rates. The difference is who carries the investment result:
| Actual return crediting | Fixed rate, for example 5% | |
|---|---|---|
| Your account earns | Whatever the investments earned, gains and losses alike | The fixed rate, every year |
| If investments beat the rate | Your account gets the gain | The plan has a surplus, and future contributions fall |
| If investments fall short | Your account takes the loss | The plan has a shortfall, and the business must make it up over time |
| Surplus or shortfall risk | Smaller, because the account tracks the assets | Larger, because the account and assets drift apart |
The crediting method is set when the plan is adopted and is generally a protected feature, so it cannot be changed freely later.
The floor at payout
Actual return crediting comes with one guarantee, the preservation of capital rule in the same regulation. When your benefit is paid out, it cannot be less than the total of every pay credit made to your account over the life of the plan. Investment returns do not count toward that total; only the pay credits do.
For example, suppose the plan has added pay credits of $600,000 over the years, and after a market fall the account is worth $560,000 when you take the money out. The business must contribute the $40,000 difference before the benefit is paid.
The floor applies at payout, not every year. In between, the account can sit below the total of the pay credits, and nothing has to be done about it until the money is paid.
The diversification rule
A plan may credit the actual return only while its investments are diversified so as to minimize the volatility of returns. That is a condition of the crediting method itself, on top of the general duties of a trustee.
In practice that rules out holding the plan's money in a single stock, a single sector, cryptocurrency or another concentrated position. What counts as diversified in between is a judgment for you as trustee.
Some other rules apply whatever the crediting method. The prohibited transaction rules (IRC 4975) stop the plan from lending money to you or the business, buying property from you or selling property to you, or holding something you use personally. Plan money also has to stay in the plan's account, separate from business and personal money.
Why returns change your future contributions
Returns do more than move your balance. They also move how much you can and must put in later.
- Strong returns leave less room. IRC 415 caps what the plan can pay you at retirement (see the 415(b) limit). Money that arrives as investment gains uses up part of that cap, so large gains can lower the maximum deductible contribution in later years. Close to the cap, they can leave a surplus the plan cannot pay you as a benefit, which is costly to deal with when the plan closes.
- Weak returns can raise the minimum. The actuary values the plan each year using an assumed rate of future interest credits and the IRS segment rates. When the assets fall behind what the valuation expects, the gap feeds into the minimum required contribution.
This is one reason owners often think about the plan's investments differently from the rest of their savings: the result feeds back into what the business contributes. How a lean year interacts with a weak market is covered in minimum contributions and lean years.
What owners tend to weigh
This is not advice about what to hold. These are the features of the plan that owners commonly take into account when they choose:
- how many years remain until you expect to close the plan or retire, since that is when the balance is paid out
- that the business, not your account, covers any shortfall below the total of your pay credits at payout
- that large gains near the 415 cap can create a surplus, and large losses can raise the minimum in a year when cash may be short
- that the plan has to stay diversified for the crediting method to apply
Many owners invest plan money more conservatively than the rest of their savings for these reasons, but the choice is yours as trustee. If you want a recommendation, speak to a licensed investment adviser.