What is a Cash Balance Plan?

A cash balance plan is an excellent way to save extra money on a tax-deferred basis for your retirement. In simple terms, cash balance plans are defined benefit plans that maintain hypothetical individual employee accounts similar to a defined contribution or 401(k) plan. Legally speaking, these plans are defined benefit plans, but in reality they’re more of a hybrid plan.

In a typical plan, your account would be credited each year with a “pay credit” (a certain percentage of compensation from your employer) and an “interest credit” (either a fixed or variable rate linked to an index like the US Treasury Bonds.) The benefit of this setup means liabilities change predictably when interest rates change, as opposed to a traditional defined benefit plan where liabilities can fluctuate dramatically. This means more modest growth rate for accounts, but also helps lessen your risk of underperformance, and since as an employer you are liable for annual contributions to the plan this is a major plus. Read More