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Cash Balance Plans
Sometimes referred to as hybrid plans, cash balance plans are defined benefit plans that resemble defined contribution plans in that the employee’s benefit is expressed as a hypothetical account balance instead of a monthly benefit.
Each employee’s account receives an annual contribution credit (usually determined by a percentage of the employee’s salary) and an interest credit based on a specified guaranteed rate or a recognized index.
At retirement, the employee’s benefit or account balance is equal to the sum of all contributions and interest credits. Although employees have the option of using the account balance to purchase an annuity benefit, employees generally take the cash balance and roll it over into an individual retirement account.
As in a traditional defined benefit plan, the employer in a cash balance plan bears the investment risks and rewards. An actuary from American Pension Advisors will determine your necessary annual contributions based on contribution credits plus the amortization of the difference between the guaranteed interest credits and the actual investment performance.
Many employees prefer these plans because they can see their accounts grow while still being protected from fluctuations in the market. Additionally, cash balance plans are more portable than other defined benefit plans, normally allowing employees to roll over their cash balance into an individual retirement account when they leave the company for retirement or any other reason.