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Understanding Cash Balance Retirement Plans
Many employers offer cash balance pension plans as a valuable part of their employees' benefits package. The best part of this benefit is that you don't have to worry about a thing. These plans are fully managed and funded by your organization—they select the investments, they contribute money on your behalf—all you have to do is go to work and meet the program's employment eligibility rules! Cash balance plans are retirement plans that are funded entirely by the Plan Sponsor based on a formula that takes into account your age, years of service, and compensation. This type of defined benefit plan is funded each year with a "benefit credit"—tied to a percentage of your compensation, as well as an "interest credit." The accruing value of a cash balance plan is defined by an actual account balance that you can track over time, similar to tracking balances in a defined contribution plan. However, unlike defined contribution plans, the fluctuations of the market do not affect your specific benefit in the cash balance plan, as the investment risks are assumed by the organization sponsoring the plan. Your vested balance is not subject to market fluctuations and can only increase as time goes on. An important benefit of a cash balance plan is portability. "Portability" means once you meet the vesting requirements of the plan, you can take a lump sum distribution when you terminate employment. Additionally, upon termination of employment, you may also elect to transfer your balance into an IRA or another qualified retirement plan (to avoid taxes and penalties) or convert the balance into annuity payments. Of course, you may also leave the money in the plan (if your balance exceeds the plan's small benefit cash out amount) to continue to accrue interest until retirement age or when you choose to withdraw your funds. Cash balance plan benefits are protected, within certain limits, by a federal agency known as the Pension Benefit Guaranty Corporation (PBGC). This protection is important should an organization become unable to fulfill its ability to pay employee benefits. In that case, the PBGC will begin paying pension benefits according to pension legislation established by the government. To learn more about the specifics of your organization's cash balance plan, be sure to consult plan documents or talk with your human resources contact. To determine which payout option is best for your personal situation, you may want to consult a tax professional or financial advisor. |
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