What is a Cash Balance Pension Plan?

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. In a cash balance plan, the employer contributes a set percentage of each employee’s compensation into an individual account, similar to a defined contribution plan.

However, the employee’s account balance is based on a predetermined formula that calculates the hypothetical balance of a traditional pension plan, with a guaranteed rate of return. This formula typically takes into account the employee’s age, years of service, and salary history.

The employee is guaranteed to receive at least the vested portion of their account balance, which accrues over time, and can receive a lump sum payout or an annuity payment upon retirement. Unlike traditional pensions, which typically provide an ongoing stream of income throughout retirement, cash balance plans typically provide a single distribution at retirement.

Cash balance plans are regulated by the Employee Retirement Income Security Act (ERISA) and are typically offered by employers as a way to provide retirement benefits to their employees while managing the risk and cost associated with traditional pension plans.