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How It Works

 

How Do Cash Balance Plans Work?

Cash Balance Plans are a great design for employers seeking to fund much larger contributions than permitted under a 401k and Profit Sharing Plan. This plan design is a type of Defined Benefit Plan, but offers some of best features of Defined Benefit Plans and Defined Contribution Plans. They can also be paired with a 401k plan to provide greater flexibility and savings potential.

In a Cash Balance plan, participants have a hypothetical “account” that is credited with a pay credit (i.e., 5% of pay) and an interest credit (index-based). Retirement benefits are usually expressed in the form of a lifetime annuity, but lump sum payment options are permitted.

Trustees make all investment decisions and generally invest in assets that track the plan’s stated interest credit. Employer contributions are required and the annual amount is determined by an actuary. The goal is to establish a steady annual rate of return that allows for more predictable contributions from year to year. If assets are invested conservatively, contributions generally do not fluctuate widely from year-to-year. Federal Guarantee – Benefits are usually insured by the Pension Benefit Guaranty Corporation (PBGC).

 
 
 
 
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