VIP Plan Advantages – Combining the Best Features of Defined Contribution and Defined Benefit Plans

SCOTT DUDA: Welcome and thanks for joining us today. I'm Scott Duda, audit partner and leader of Cherry Bekaert's Professional Services Industry Group.

JEFF GUMP: With me today is Jeff Gump, financial advisor with Cherry Bekaert Wealth Management. I'm glad to be here. I asked for a quick bio: I've been a financial advisor since 1999, so 22-plus years. I work with a lot of high-net-worth clients, partner-based firms, and middle-market business owners, which is why you asked me on today.

SCOTT DUDA: Great. Thank you. Today we're going to talk VIP. To me VIP means a very important person, but in today's discussion we're talking about deferred comp plans. We're seeing lots of interest from professional services clients as we come out of the pandemic. That uncertainty is behind us, and they're looking at these deferred comp plans, which line up well with professional services firms. Jeff, can you tell us a little bit about exactly what a VIP plan is?

JEFF GUMP: Sure. It's not "very important person." The official title is Direct Recognition Variable Investment Plan, which we shorten to VIP. Quite simply, it's a qualified retirement plan that's a defined benefit plan. It's very specialized; it's meant to optimize benefits for targeted employees, mitigate risk, and minimize costs for employer matching.

JEFF GUMP: It's a way to put more money away for targeted employees within a partner-based practice or company. We do this in partnership with Cherry Bekaert Benefits Consulting (CBBC), one of the few TPAs that can design and administer these plans. The collaboration is Cherry Bekaert Wealth Management handling asset management, Cherry Bekaert Benefits Consulting doing plan design and TPA work, and then recordkeeping.

JEFF GUMP: Typically, you have your normal deferred comp or 401(k) plan, often with a profit-sharing component, but those have contribution limits. For someone under 50, between employee and employer contributions, it's $61,000. For someone over 50, with catch-up, it's up to $67,500. For high earners, that's often not enough, so the VIP allows an additional layer to make pre-tax contributions.

SCOTT DUDA: So why should business owners and professionals consider it? Why is this a good fit for them?

JEFF GUMP: No one likes to pay taxes. By adding this plan, employers and employees can reduce business and personal taxes. Often they can double or triple pre-tax savings versus just a 401(k) and employer match. For example, a target employee age 60 could put up to $330,000 in pre-tax savings when layering a VIP on top of a 401(k).

JEFF GUMP: Another advantage for lawyers, doctors, and other professional service firms is creditor protection. The plan is protected from bankruptcy and lawsuits. In a tight labor market, it helps attract and retain employees by offering an additional retirement benefit. If someone leaves or retires, the VIP balance can be rolled into an IRA, similar to a 401(k).

SCOTT DUDA: I know many of the folks we speak with are focused on attracting and retaining talent, so that makes sense. Often when we bring up VIP, clients say they've considered a defined benefit or cash balance plan. How does a VIP differ from those plans?

JEFF GUMP: The biggest difference is funding volatility. In a traditional cash balance plan, there's a target interest crediting rate, say three to five percent. If the pooled account loses value, the employer may have to make up the shortfall, which scares some people away.

JEFF GUMP: A VIP is variable. It's a pooled account where everyone goes up and down together, which removes that underfunding risk. Contributions are known and consistent; we typically look for a three-year commitment because you won't face unexpected additional funding in down years.

JEFF GUMP: Investment posture can differ too. Cash balance plans often use conservative investments to avoid crediting shortfalls. Since the VIP is variable, pooled accounts can be more aggressive—typical VIP pooled accounts are around a 50/50 or 60/40 stock-to-bond mix—potentially yielding better long-term returns.

JEFF GUMP: Another difference is valuation and distributions. Typical cash balance plans have annual valuations and monthly distributions that can affect plan funding. VIPs have daily valuations, allow distributions at any time, and distributions do not affect funding status. With Cherry Bekaert Benefits Consulting's website, the 401(k) and VIP are on the same sign-on, so employees see both accounts daily. To my knowledge, CBBC is the only firm offering daily valuation.

SCOTT DUDA: If someone wants to explore a VIP, what does that process look like? What information and attributes do firms need for it to be a good fit?

JEFF GUMP: As a rule of thumb, you can have as few as one targeted employee. "Targeted" typically means business owners, C-suite executives, or anyone you want to retain. We look for a one-to-five target-to-staff ratio as optimal, though one-to-ten can still work.

JEFF GUMP: The plan works well if targets are older than staff—say three partners in their late 50s or 60s with younger staff—because it's pension-based. The larger the compensation gap between targets and staff, the better the plan tends to perform for targets. Professional service firms—doctors, lawyers, A&E—often fit well.

JEFF GUMP: Cherry Bekaert Benefits Consulting will provide a free scope. To get that, we need a census, which HR usually has. The census should include each employee's date of birth, hire date, current 401(k) deferrals, ownership percentage, who you want to target, and prior-year compensation. We also need to segment anyone making over $135,000 in 2022 because they are considered highly compensated employees and are treated differently.

JEFF GUMP: With that data, the actuaries and plan designers will show the maximum pre-tax contributions the targets can make and the required staff matching or contribution costs. They will present an efficiency ratio showing how many dollars go to targets versus staff matching. Often the theoretical maximum isn't practical for everyone, so we then model what participants are willing to commit to for three years and rerun the design.

SCOTT DUDA: In my experience, the census is usually available, and once we have it we can run many scenarios, so it's a fairly painless process to start the discussion.

JEFF GUMP: Exactly.

SCOTT DUDA: Thanks, Jeff, for explaining this in a way a non-tax person like myself can understand. For those listening, if VIP sounds like something you'd like to consider—whether for talent attraction and retention, increasing pre-tax deferral, or saving taxes—the VIP is something many professional services clients are starting to consider post-pandemic. Our contact information is where you access the podcast; please let us know if you're interested in discussing the VIP.

JEFF GUMP: Required legal disclosure: Investment advisory services and insurance products are offered through Cherry Bekaert Wealth Management. Cherry Bekaert Wealth Management LLC and Cherry Bekaert LLP are affiliated companies. Cherry Bekaert Benefits Consulting and Cherry Bekaert Wealth Management LLC partner to service the VIP but are not affiliated companies.