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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


If you are offered a choice of staying in the traditional pension plan or selecting the new cash balance plan, how do you decide which one to choose?

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

One approach is to compare the value of pension benefits at each age starting from the conversion date. You may want to look at the value at every ten years ending with your likely retirement age.

In order to compare apples to apples, you have to compare the cash balance account to the present value of monthly pension at selected ages.

Example
In our example, we assume Mary Smith is 40 years old on June 30, 1999. She joined the ABC Company 10 years ago, on July 1, 1989. ABC Company is converting its traditional pension plan to a cash balance plan on July 1, 1999.

Let us assume the traditional pension formula is 2% of final average pay for each year of service. We assume Mary's annual pay is $50,000 a year. The new cash balance plan is crediting 5% of pay to her account with the account earning an annual interest of 5%.

The following tables show the comparison:

Cash Balance Plan
Attained Age 40 50 60 65
Cash Balance Account
at Attained Age
$22,434.91   $67,996.77   $142,191.45   $195,315.00  


Traditional Pension Plan
Attained Age 40 50 60 65
Accrued Pension
(monthly)
$833.33   $1,666.67   $2,500.00   $2,916.67  
Present Value Factor*
(Annual)
2.2435   4.0827   7.6311   10.6464  
Present Value
at Attained Age
$22,434.91   $81,653.67   $228,933.00   $372,624.43  


* Present Value Factor is calculated based on GATT mortality table and 6% interest rate, with normal retirement age of 65 and Life-Only annuity. Present Value is Accrued Pension (monthly) x 12 x Present Value Factor.

Conclusion
In this example, it is clear that you want to stay in the traditional pension plan. However, each person's situation is different, and it is important to analyze your personal situation carefully prior to making any decisions.


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