A cash balance plan is a special type defined benefit plans that guarantee participants earnings at a specified rate. This type of plan can offer an attractive alternative to a traditional defined benefit plan. The following offers a brief overview of some of the benefits of cash balance plans.
Cash Balance Plan – Participant Perspective
A cash balance plan is one in which participants earn a monetary benefit for each year of service. The benefit is banked and at the end of each succeeding year, interest, at the rate stipulated in the plan, is added. The whole process being similar to a savings account, for which a deposit is made on an established annual date. Participants benefit, since they incur no investment risk.
Younger participants frequently find this type of plan attractive because the benefit is generally portable and unlike a traditional pension plan the benefit’s value at any point in time is readily determinable.
Cash Balance Plan – Sponsor Perspective
Cash balance plans can be more attractive to sponsors with an aging work force because the annual benefits don’t escalate as employees approach retirement age, as they would in a traditional pension plan. However, if this is a transition plan there may be a need to have a transition feature that protects older workers, in order for the plan not to be deemed discriminatory.
Well thought out cash balance plans can be significantly more cost effective than traditional pension plans.
Plan administrators, interested in cash balance plans are advised to speak to their retirement plan consultant to gain a more complete understanding of the costs and benefits of cash balance defined benefit plans.
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For more information on this topic, please contact a member of Withum’s Employee Benefit Plan Services Team.
