A cash-balance plan is a defined benefit plan that is very similar to a traditional defined benefit pension plan but with a few features that more closely resemble a 401(k) defined contribution plan.
Below are a variety of questions and answers related to Cash Balance Plans. Are you an advisor or broker? Check out our Advisors Guide to Cash Balance Plans to learn more about how you this retirement solution can benefit certain clients you serve or to help you win new business.
How are cash balance plans and traditional pensions similar?
With a Cash Balance Plan, the employer is making a contribution into each employee’s account (not the employees), and the employees have no responsibility or control over how those funds are invested.
How are cash balance plans different from traditional pensions?
In a traditional cash balance plan, the participants retirement benefit is based on a formula that takes into account how long they were on the job and the employee’s average salary during the last few years of employment. In a Cash Balance Plan, each employee’s virtual account receives a set percentage of their salary each year, typically 5%, plus a set interest rate that is applied to the balance.
Each year, the employee receives a statement that shows the hypothetical value of the virtual account, as well as what sort of monthly income payout (or lump sum) that will generate they retire at age 65. If the plan is terminated or if the employee leaves the company before retirement age, participants may take the contents of the cash-balance plan as a lump sum and roll it into an IRA. This is not an option available with a traditional pension.