Cash Balance Pension Plan
136 Views · Updated December 5, 2024
A cash balance pension plan is a defined-benefit pension plan with the option of a lifetime annuity. The employer credits a participant's account with a set percentage of their yearly compensation plus interest charges for a cash balance plan. The funding limits, funding requirements, and investment risk are based on defined-benefit requirements. Changes in the portfolio do not affect the final benefits received by the participant upon retirement or termination, and the company bears all ownership of profits and losses in the portfolio.
Definition
A Cash Balance Pension Plan is a type of defined benefit pension plan with a lifetime annuity option. Under a cash balance plan, employers credit participants' accounts with a percentage of their yearly earnings plus interest charges.
Origin
The Cash Balance Pension Plan originated in the late 1980s and early 1990s as an alternative to traditional defined benefit plans. It was designed to attract and retain employees by offering a more flexible benefits structure.
Categories and Features
Cash balance plans are a type of defined benefit plan characterized by: 1. Employers providing annual credits to each participant's account based on their earnings and a predetermined interest rate. 2. Investment risk is borne by the company, and participants' final benefits are unaffected by portfolio changes. 3. Participants can choose a lump sum or convert to an annuity upon retirement or termination.
Case Studies
Case Study 1: IBM converted its traditional pension plan to a cash balance plan in 2000 to reduce costs and offer more attractive employee benefits. Case Study 2: AT&T implemented a cash balance plan in 1998 to provide employees with more transparent and predictable retirement benefits.
Common Issues
Common issues include misunderstandings about investment risk, with many participants believing their account balances are affected by market fluctuations. In reality, the investment risk is borne by the company, and participants' benefits are predetermined.
Disclaimer: This content is for informational and educational purposes only and does not constitute a recommendation and endorsement of any specific investment or investment strategy.