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.
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cash balance plan

A qualified employer pension plan in which the employer guarantees a contribution level and minimum rate of return.
Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. All rights reserved. All rights reserved.

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.

Dictionary of Financial Terms. Copyright © 2008 Lightbulb Press, Inc. All Rights Reserved.
References in periodicals archive ?
Setting up a cash balance plan isn't the right strategy for every business.
The idea for the cash balance plan came from some Houston business leaders worried that Turner's plan would not adequately shore up the shortfalls and would lead to cuts in city services or employee layoffs.
Our final observation is that even though the Treasury market is liquid only out to 30 years, the cash balance plan has short interest rate sensitivity to Treasury bond yields beyond that time frame, due to the forward-looking nature of interest-crediting rates.
Although the owner-employees of professional practices could obtain significant tax savings by using a cash balance plan, they should undertake a comprehensive retirement planning and business analysis to determine whether it is appropriate for them.
If the firm and employees value the implicit contract, the firm is less likely to break the implicit contract outright (terminate the defined benefit plan) and more likely to convert to a cash balance plan (modify the contract) and the estimated coefficient for PWT should be negative.
Second, public employers could shift to DC or cash balance plans, both of which generate benefits based upon lifetime earnings and contributions.
One factor fueling the rise of cash balance plans, the report adds, is the 2006 Pension Protection Act.
It also included details about the choice that retirees would have between the cash balance plan and the minimum benefit.
Finally, transition costs from a defined benefit pension to a cash balance plan would quickly drain public coffers.
Among the changes being considered is a provision that would allow employees to convert accrued benefits into a cash balance plan.
A unique retirement plan variation can grease the skids of an exit strategy and leave all parties in a win-win situation: the creative use of a special retirement hybrid known as a cash balance plan. In the context of a partnership buy-out, you can incorporate a cash balance plan as an overlay to an existing 401 (k) plan and create the opportunity for massive retirement plan contributions for older people in their 60s.
A cash balance plan is a defined benefit plan that calculates benefits in a manner similar to defined contribution plans.