What is a Cash Balance Pension Plan?
A cash balance pension plan is a type of defined benefit plan that provides employees with a set retirement account balance, which grows over time. Unlike traditional pension plans that calculate retirement benefits based on a formula related to salary and years of service, cash balance plans present benefits in the form of hypothetical accounts. Each employee has an individual account, which receives contributions from the employer and earns interest.
How it Works
In a cash balance plan, the employer specifies a contribution rate, typically a percentage of salary, and an interest crediting rate. Contributions are made annually, and the balance grows with interest, usually tied to long-term rates or a fixed percentage. Employees receive a statement showing the balance of their cash balance account, making it easier to understand and track retirement savings.
Advantages
One of the primary advantages of cash balance plans is predictability. Employees know how much they will receive at retirement based on their account balance. Additionally, these plans can be easier to manage for employers compared to traditional pension plans, as they do not require complex actuarial calculations. This design also appeals to younger employees, making it an attractive option in the competitive job market.
Conclusion
Overall, cash balance pension plans merge the features of defined benefit and defined contribution plans, providing security for employees while allowing for flexible contribution strategies for employers.