What is 'Cash Balance Pension Plan'

A cash balance pension plan is a pension plan in which an employer credits a participant's account with a set percentage of his or her yearly compensation plus interest charges. A cash balance pension plan is a defined-benefit plan. As such, the plan's funding limits, funding requirements and investment risk are based on defined-benefit requirements: as changes in the portfolio do not affect the final benefits to be received by the participant upon retirement or termination, the company solely bears all ownership of profits and losses in the portfolio.

BREAKING DOWN 'Cash Balance Pension Plan'

Although the cash balance pension plan is a defined-benefit plan, unlike the regular defined-benefit plan, the cash balance plan is maintained on an individual account basis, much like a defined-contribution plan. The cash balance plan acts similar to a defined-contribution plan also because changes in the value of the participant's portfolio does not affect the yearly contribution.

The added features of a cash balance pension plan resemble those of 401(k) plans. As in a traditional pension plan, investments are managed professionally and participants are promised a certain benefit at retirement. However, that benefit is stated as a 401(k)-style account balance, rather than in the terms of a monthly income stream.

Having a cash balance pension plan, in addition to a 401(k), can help a retirement saver slash their tax bills and bolster their nest egg. However, those who depend on generous traditional pension plans are less enthusiastic.

Many older business owners seek out these types of plans to turbocharge their retirement savings because of the generous contribution limits that increase with age. People 60 years and older can sock away well over $200,000 annually in pretax contributions. In a 401(k), total employer and employee contributions for those 50 and older are limited to $57,500.

How Cash Balance Pension Plans Work

Cash-balance employer contributions for rank-and-file employees usually amount to roughly 5 to 8 percent of pay, compared with the 3 percent contributions that are typical of 401(k) plans. Participant accounts also receive an annual "interest credit," which may be a fixed rate, such as 5 percent, or a variable rate, such as the 30-year treasury rate. At retirement, participants can take an annuity based on their account balance or a lump sum, which then can be rolled into an IRA or another employer's plan.

Cash balance pension plans can be more costly to employers than 401(k) plans, in part because an actuary must certify each year that the plan is properly funded. Typical costs include $2,000 to $5,000 in setup fees, $2,000 to $10,000 in annual administration fees, and investment-management fees ranging from 0.25 to 1 percent of assets.

RELATED TERMS
  1. Corporate Pension Plan

    A corporate pension plan is a formal arrangement between a company ...
  2. Allocated Funding Instrument

    Allocated funding instrument is a type of insurance or annuity ...
  3. Integrated Pension Plan

    An integrated pension plan uses a participant's Social Security ...
  4. Past Service

    Past service encompasses the period before an employee participated ...
  5. Pension Risk Transfer

    Pension risk transfer is when a defined benefit pension provider ...
  6. Pop-Up Option

    A pop up option is a joint and survivor pension option that is ...
Related Articles
  1. Retirement

    New 401(k) Pension Rollover Rule: Pros and Cons

    Is the new rule allowing participants to roll their 401(k) balances into pensions a good idea?
  2. Retirement

    7 Signs Your Pension Fund Is In Trouble

    Even if you're lucky enough to have a pension plan, you can't assume it'll pay out.
  3. Retirement

    America's Frozen Pension Dilemma

    Unfortunately, there are several factors that have eroded the presence of pension plans in America, and workers need to be prepared to replace that expected income for their retirement years. ...
  4. Retirement

    How Safe Is Your Pension?

    A 2014 law permits some private pension plans to reduce benefits. How to figure out if your retirement income is endangered.
  5. Financial Advisor

    How Do Pension Funds Work?

    Traditional private pension funds are well regulated by the government through ERISA and the PBGC. Alternative investments are aiding portfolio returns.
  6. Retirement

    5 Big Companies That Have Cut Out Pension Plans

    Companies are putting the responsibility of saving for retirement on the employee.
  7. Personal Finance

    Can Blockchain Solve the Global Retirement Crisis?

    Blockchain comes at a crucial time and may represent the savior of pension plans everywhere.
Trading Center