cash balance plan

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Cash Balance Plan

A pension plan that combines features of a defined-benefit plan and a defined-contribution plan. Like a defined-benefit plan, a cash balance plan guarantees the pensioner a certain benefit upon retirement. That is, the amount one receives from a cash balance plan does not vary according to the performance of some portfolio. Like a defined-contribution plan, the employer agrees to place a certain percentage of one's salary into the plan each year, and accounts are created on an individual basis. A cash balance plan can be rolled over into another account if the employee changes jobs. As a result, it is relatively popular with younger workers.

cash balance plan

A qualified employer pension plan in which the employer guarantees a contribution level and minimum rate of return.

Cash balance plan.

A cash balance retirement plan is a defined benefit plan that has many of the characteristics of a defined contribution plan.

The benefit that you'll be entitled to builds up as credits to a hypothetical account. The hypothetical account is credited with hypothetical earnings, based on a percentage of your current pay.

These plans are portable, which means you can roll them over from one employer to another when you change jobs. That makes them popular with younger and mobile workers.

But they are often unpopular with older workers whose employers switch from a defined benefit to cash balance plan because their pensions may be less than with traditional defined benefit plans.

References in periodicals archive ?
On the surface, cash-balance plans look a great deal like 401(k) and other savings plans, but there are some important differences.
Larry Sher, a principal and director of research at New York-based Buck Consultants, says the new regulations offer a number of "safe harbors" for companies that want to convert to cash-balance plans, but says he is uncertain they will allay the concerns of critics who claim the plans discriminate against older workers.
Eric Lofgren, global director of the benefits consulting group, Watson Wyatt Worldwide, on the debate surrounding cash-balance plans versus traditional pension plans.
The survey was based on interviews with 100 CFOs from North American organizations with defined-benefit or cash-balance plans with assets of $20 million or more; the average DB plan had assets of $344 million.
Unfortunately, high-profile litigation several years ago surrounding some conversions from traditional to cash-balance plans limited their popular appeal.
The company has added plan-design options, including cash-balance plans and how they can complement 401(k) plans, said Gradeless.
For "hybrid" or cash-balance plans, which combine features of DB and DC plans, the PPA has been a blessing: it specifically affirms their status, defines them and concludes that they are not age-discriminatory, which had been a common complaint, Glickstein notes.
The technology giant's move is the latest in a growing trend among large employers--once the bastion of defined benefits in the private sector--to freeze defined-benefit and cash-balance plans.
According to Ippolito and Thompson's (1999; Industrial Relations, 39: 228-245) excise tax avoidance hypothesis, a number of firms have switched to cash-balance plans because conversion allows the firm to avoid excise taxes on its excess pension assets.
The proposed regulations are well-intentioned and offer some positive news for plan sponsors, including a rejection of the charge that cash-balance plans inherently violate age discrimination," he says.
Cash-balance plans are reflections of changing economic realities.
Qlder employees, however, may receive reduced benefits under cash-balance plans because their final years of high earnings are no longer a major factor in their benefit computation.