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Member, Beacon International Group, Ltd.
Launched more than 25 years ago, cash balance pension plans derive their name from their design.
Employees earn credits — expressed as a percentage of pay — that the employer agrees to provide. In addition, account balances grow by a guaranteed amount, such as the one-year U.S. Treasury bill rate, plus 1 percentage point.
Cash balance plan participants' benefits are expressed as lump-sum dollar amounts. That distinguishes cash balance plans from traditional pension plans, in which benefits typically are expressed as a monthly annuity payable when an employee reaches retirement age.
Also like defined contribution plans, when employees leave a company, cash balance plans allow them to take a lump sum payout and roll that payout over into an individual retirement account or into a new employer's plan, assuming the new employer still offers a defined benefit plan that hasn't been frozen.
Employees in cash balance plans have individual accounts, but those accounts are established only for record-keeping purposes. There is only one plan, and employer contributions are made to that plan and not to individual employee accounts.
Like traditional plans, cash balance plans are funded on an aggregate basis with employer contributions determined by various factors, such as assumptions about future salary increases, employee turnover and investment returns.
Once the domain of large companies, cash balance pension plans now are being embraced by mid-market professional firms, benefit experts say.