A cash balance plan is a unique type of retirement plan that combines the security of a pension with the transparency of a 401(k). Here’s a simple breakdown of how it works and why it’s becoming so popular.
What Is a Cash Balance Plan?
A cash balance plan is technically a defined benefit plan, but it acts like a defined contribution plan in many ways. Employees see their retirement benefit as a growing account balance—even though it's fully funded and managed by the employer.
Key Features
- Employer-Funded: Only the employer contributes, unlike 401(k)s which rely on employee deferrals.
- Guaranteed Growth: Each participant receives “pay credits” (a percentage of salary) and “interest credits” (a guaranteed annual rate).
- Higher Contributions: Contributions can be much larger than a 401(k), especially for older or higher-income employees.
- Portable & Flexible: When an employee leaves, they can take their vested balance as a lump sum or roll it over to another retirement account.
- Employer Bears Risk: The employer must ensure investments meet the promised benefit.
- PBGC Protection: Benefits are typically backed by the Pension Benefit Guaranty Corporation.
How It Works
- Each year, the employer credits an employee's hypothetical account with a % of their salary + interest.
- The employer invests plan assets to meet the future benefit.
- At retirement or separation, the employee gets the vested account balance—either as a lump sum or a lifetime annuity.
Why It’s Popular
- Business Owners use it to maximize retirement savings and reduce taxable income.
- Employees enjoy predictable, guaranteed benefits with greater portability.
- It blends the security of pensions with the clarity of 401(k)-style balances.
Interested? Contact us for more information regarding Cash Balance Plans!