What is a Cash Balance Pension Plan?
A Cash Balance Pension Plan is a type of defined benefit retirement plan that combines features of both traditional pensions and defined contribution plans. Unlike traditional pensions, which provide a monthly benefit based on salary and years of service, cash balance plans specify a hypothetical account balance for each participant.
How It Works
The employer contributes a certain percentage of the employee's salary into their cash balance account, which grows at a set interest rate. This account balance is credited annually, and employees are provided with statements illustrating their accrued balance. Upon retirement or leaving the company, participants can choose to receive their benefits as a lump-sum payment or an annuity.
Advantages
- Predictable Growth: The plan guarantees a minimum interest credit, providing a more predictable growth path compared to typical stock market investments.
- Employee Retention: Cash balance plans can enhance employee retention by offering substantial benefits for long-term employees.
- Flexibility: Employees have the option to take their benefits as a lump sum, which can be particularly appealing for those seeking immediate access to funds.
Considerations
While cash balance plans offer various benefits, they may have limitations regarding the employer's contributions and the rules governing withdrawals. It's essential to consult a financial advisor to understand how this plan aligns with your retirement goals.