Cash Balance Pension Plan
Candlefocus EditorThese plans introduce the concept of individual accounts for each employee, much like a 401(k) or IRA. Each employee’s account accumulates a specific percentage of their salary (often based on age and service) plus interest each year. Employers guarantee the account balance on a certain date and pay out a lump-sum payment to the employee upon retirement. Additionally, employers may use the cash balance plan to provide employees more than the standard pension of a defined benefit plan.
Employers that offer cash balance pension plans typically make larger contributions to each employee’s account than they would with a traditional defined benefit plan. This is advantageous to the employee, as it means that the employee’s benefit increases as they age and their salary increases. Additionally, cash balance plans offer more flexibility in terms of contributions and distributions than other retirement plans, and they are less expensive to maintain and administer than traditional pension plans.
Cash balance pension plans are also ideal for employers who may want to terminate a retirement plan without paying large amounts of money to their employees. Such plans allow employers to terminate the plan by terminally funding each employee’s account balance and paying out lump-sum distributions in lieu of long-term benefits.
Cash balance pension plans are an attractive retirement option for employers and employees alike. For employers, these plans offer a more cost-effective and flexible option for providing retirement benefits. For employees, these plans provide the security of a guaranteed retirement benefit, plus the potential for increased contributions, flexibility in contributions and distributions, and increased benefits over time.