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Cash Balance Plan
Cash balance and defined benefit plans offer a pre-established benefit or account balance typically dispersed in a series of payments during retirement or as a single-sum payment at retirement.
Cash balance plans accrue assets in two ways:
- Pay credit: the employer contribution
- Guaranteed interest credit rate: the mandated participant earnings
As with traditional defined benefit plans, the employer bears the risk of the investment performance.
Hybrid Plans
These plans are commonly referred to as hybrid plans because they have the look and feel of a defined contribution plan, but the payments are calculated based on a formula like any defined benefit plan.
Similar to 401(k) plans, cash balance plans are portable, so participants may take their savings with them when they leave the employer and either roll the amount into an individual retirement account or a plan at their new employer.
Points to Consider
Cash balance plans are more complex and costly than 401(k) plans, as they require actuarial work and cross-testing. Consider some of these other points to determine if they are a good fit for you:
- Mandatory annual contributions
- Plans are legally binding
- Pay credit must be defined with specification of the guaranteed interest crediting rate
- Meeting the interest credit rate annually can be challenging, and sometimes plans may be slightly under- or over-funded
- Plans have some flexibility – can be frozen, amended or terminated in certain circumstances
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