What is a cash balance plan?
A cash balance plan is a type of a defined benefit pension plan. It is commonly referred to as a hybrid plan since it is a defined benefit plan but the benefit accumulation for employees looks and operates like a defined contribution plan. Cash balance plans became popular during the 1990s since they are easier for participants to understand and they are less volatile for employers to manage than traditional defined benefit plans.
Cash balance plans accumulate benefits for participants in a similar fashion as 401(k) plans. Each year, the employer adds a contribution to the participant’s account. This contribution is usually based on a percent of pay that may vary based on service, age, or points (age + service). Also, the account earns interest each year. Most plans credit interest based on recent yields for government bonds such as a 30-year Treasury bond.
This article was last updated on August 22, 2012