Cash balance defined benefit plans are offered by many large employers; according to a recent survey by Towers Watson, 25 percent of the Fortune 100 offer these retirement plans to their employees. A cash balance plan is a hybrid retirement plan that shares some features of both a traditional pension plan and a 401(k) plan.
Here’s how they work:- Like a 401(k) plan, your benefit is an account that grows with contribution and interest credits. Usually you can take the full amount in your account with you when you terminate or retire.
– Like a pension plan, your employer takes any investment risk; before you retire, your account always earns the interest crediting rate that’s specified in the plan, even if the assets in the pension trust tank due to a market downturn.
– As with a pension plan, at retirement, you have the option to have the plan pay you a monthly retirement income — a.k.a. an annuity — for the rest of your life, or take the money and roll it over to another type of income-generating account.
So when you retire, should you take your account and roll it over to another type of account that could generate a monthly income for you, such as an IRA or annuity, or should you elect to have the plan pay you the monthly annuity? One way to come up with the best answer to this question is to compare the monthly income you would get from your employer’s cash balance plan to the annuity income you’d get if you took the lump sum payout and bought an annuity from an insurance company.
The cash balance plan is an excellent plan design for many closely held businesses and professional service firms. This is not appropriate for all companies but when it works it is a very attractive benefit to attract and retain top talent.
Please comment or call to discuss how this plan design might work for your company.
- New Annuity Rules for 401(k)s (money.usnews.com)
- Wrong pension choices could mean longer at work (gateway-homes.co.uk)
- Eight suggestions for improving your 401(k) plan (401kplanadvisors.com)