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Frequently Asked Questions: CBP

Quick Review of a Cash Balance Plan

  1. It is a hybrid plan.
    It has the features of a 401(k) plan and characteristics of a defined benefit plan. An account is set up for each participant in a cash balance plan. The account will increase each year based on new credit (a percent of pay) and a theoretical investment return rate such as a fixed percent tied to a known market rate such as the US 30-year treasury bill rate. At termination of employment or retirement, the account balance is the benefit to the participant. The plan must have provisions to calculate the equivalent monthly pension benefits.

  2. It is actually a defined benefit plan.
    The benefit in a cash balance plan is defined. You can determine your cash balance and calculate your monthly pension benefits based on the formula used in the plan document.

  3. Your benefits are protected by the Pension Benefits Guaranty Corporation (PBGC)
    Because it is a defined benefit plan, it is governed by Employee Retirement Income Security Act of 1974 (ERISA) and your benefits up to a certain limit are protected by the PBGC. Your employer pays an annual premium to PBGC for this protection.

  4. Most likely, you are not required to make contributions.
    Most plan sponsors fund 100% of their cash balance plans. Cash balance plans are not popular in the public sector. The contributions required to fund the plan benefits are not defined, but are calculated by an enrolled actuary based on actuarial liability, plan assets, and funding method adopted by the plan sponsor.

  5. You are not responsible to make investment choices.
    Your plan sponsor is responsible for the investment of plan assets - higher returns will reduce future employer contributions, lower returns will increase future contributions. The plan assets are not separated for individual participants.

  6. You are entitled to a benefit only after you are vested
    Private sector defined benefit plans have to adopt one of the two vesting schedules. Most private sector plans adopt 5-Year 100% vesting. You are only entitled to a pension benefit if your are vested.

  7. The value you earned each year in your cash balance account is fairly constistent as a percent of pay.
    Unless special provisions are included in the plan for older employees, most cash balance plans allow you to accrue a value in your account in a constant manner as a percent of pay. It benefits younger and mobile employees while older employees may lose especially those converted from a traditional pension plan.

  8. It is an important source of pension benefits at retirement for many corporate employees.
    Many large corporate employers in the United States have converted their traditional defined benefit plan to a cash balance plan. For them, this will be the main source of pension benefits at retirement.