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Case Study: CBP vs. DB

Are You Better Off Retiring Under A Cash Balance Plan Or A Traditional Pension Plan?
Case Study


Depending on your career goals and personal circumstances, the two examples below should help you in making your decisions.

Example One - New Employee
Assume a new employee hired at age 25, starting annual salary of $36,000 with an annual pay increase of 4%.

Example one compares lump sum value at attained ages for cash balance plan and traditional pension plan running parallel for the entire career of the newly-hired employee. The table below provides the employee with the answer.

Example One - New Employee
Attained Age 25 35 45 55 65
Cash Balance Account
at Attained Age
$0   $27,960   $91,441   $225,008   $493,623  
Traditional Lump Sum Value
at Attained Age
$0   $15,848   $84,839   $346,595   $1,310,674  


Conclusion for Example One - New Employee
Cash balance plan works better for younger mobile employees with short term career horizon. Because of the heavy loading in the latter years under a traditional pension plan, it is better to retire under a traditional pension plan with longer years of service.

Example Two - Career Employee
Assume the career employee in the traditional pension plan at age 55 with 30 years of service, experiences the conversion of this plan to a cash balance plan. The employee was given the right to stay in the traditional plan. Which is the better choice? The table below provides the employee with the answer.

Example Two - Career Employee
Attained Age 55 65
Cash Balance Account
at Attained Age
$346,595   $711,300  
Traditional Lump Sum Value
at Attained Age
$346,595   $1,310,674  


Conclusion for Example Two - Career Employee
example clearly shows it is better to retire under the traditional pension plan for a career employee.

Assumptions used in both examples
Cash Balance Plan
The cash balance account is credited with 5% of pay and 6% of annual interest.

Traditional Pension Plan
The lump sum value is calculated using single life pension commencing at normal retirement age of 65 based on the following benefit formula: 2% x Years of Employment x Final 5-Year Average Pay x Lump Sum Factor. The lump sum factor is calculated based on GATT mortality table and 6% annual interest rate.

Final Note
No two pension plans are alike, and no two employees are similar, so you have to compare the numbers based on your personal information.

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