Is a cash balance plan right for your organization?

Institutional Retirement and Trust Is a cash balance plan right for your organization? Since the first cash balance plan was established in 1985, many cash balance account is the sum of the compensation credits for employers, both large and small, have adopted this plan design prior plan years provided under a benefit formula that expresses for their defined benefit plan. The cash balance plan design the compensation credit based on age, service, a percentage of offers many elements of a defined contribution plan within the compensation, or all of these factors. framework of a defined benefit plan. The decision to establish a new cash balance plan, or convert an existing plan to a cash The compensation credit approach closely resembles

the balance plan, must be made after considering the plan’s effect approach of the typical defined contribution plan. The cash on both the employer and the participants. This paper provides balance account also receives interest credits periodically an overview of cash balance defined benefit plans from both the (typically based on an outside financial or investment index). employer and employee perspective. These interest credits appear the same as the investment earnings of an account within a defined contribution plan, except that they Defining traditional defined benefit plans are guaranteed to the participant. Throughout this paper we use the term “traditional defined benefit The compensation credits and interest credits continue to be plan.” A traditional defined benefit plan has several common added to each participant’s account until the participant leaves the features. First, a traditional defined benefit plan typically defines company due to voluntary termination, disability, death, or the benefit in terms of a monthly income payable at a specified retirement. Further, if the participant defers the payout of the normal retirement age such as 65. Traditional defined benefit cash balance benefit until a later date, the cash balance account plans may also pay a lump sum amount, but the benefit is usually continues to accrue regular interest credits while in the plan. expressed in terms of a monthly income rather than in terms of a lump sum amount or cash balance. Second, the monthly The primary cash balance formula for the plan may be income benefit is determined based on a mathematical formula supplemented by a traditional defined benefit plan formula. that uses a participant’s service, salary, or both to determine the When there is more than one formula provided, the participant monthly income. Third, the participant may often retire under often receives the greater of the benefit determined under the cash the plan at points in time other than the normal retirement age; balance formula or the traditional formula. The traditional in these cases, there are adjustments to the benefit based on the formula is thus used to provide a guaranteed minimum benefit participant’s age when his/her benefits begin either permanently or during a temporary transition period. Understanding cash balance plans When the participant leaves the company, the vested cash balance account is typically paid as a lump sum. However, since this is a A cash balance plan is a defined benefit plan that has plan feature defined benefit...

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