Jess called me with an urgent question about her retirement plan. “I have a pension/cash balance plan. My actuary just told me the contribution I can put in this year is cut in half. Why is this?”
“Usually, this happens for two reasons:” I explained.
“It could be that your assets have grown in value considerably. Most plans project an asset growth of 5% a year. If your assets grow more than that, your maximum contribution will be reduced.
“Another circumstance that affects maximum contributions occurs when your plan’s assumed interest rates increase dramatically. The higher the interest rates the actuary uses, the lower the contribution you can be put into the plan.”
“So what does this mean?” asked Jess.
“The good news is that your plan is performing so well that the system is putting the brakes on your contributions. You’re receiving the maximum benefits.”
Jess let out a sigh of relief and then raised a curious eyebrow. “Are there ways I can get more out of the plan?”
“The fact that your contribution was cut in half is not inevitable,” I explained. “If you plan early enough, you can make changes to your retirement plan and avoid significant contribution reductions.”