Technically, a cash balance plan is a defined benefit plan. However, since these plans also have some of the characteristics of a defined contribution plan, they are frequently called a "hybrid" plan.
Like a defined benefit plan:
- The benefits, rather than the contribution, are defined by the plan.
- The employer makes contributions to the plan based on the same kinds of actuarial assumptions.
- The employer is responsible for any shortfall between the value of the plan and its benefit commitments.
- The plans are covered by the Pension Benefit Guaranty Corporation (PBGC), and the employer must pay premiums.
Like a defined contribution plan:
- Individual accounts are established and maintained.
- Employees are generally given account statements showing them the value in their account on a regular basis.
A cash balance plan is unique:
- In establishing and crediting individual accounts with income based on a predetermined formula/rate, regardless of the actual investment return of the plan;
- Balances accumulate gradually over an employee's career.
Traditional defined benefit plans tend to use a final average pay formula, while cash balance plans tend to use a career average pay formula. Without corrective action, this can hurt the retirement income of older workers who are close to retirement when their company makes the switch.
September 08, 2010
Court Preserves Early Retirement Subsidy Notice Issue
Court Preserves Early Retirement Subsidy Notice Issue
September 8, 2010 (PLANSPONSOR.com) – A federal appellate court has cleared Solvay Chemicals Inc. of wrongdoing in its cash balance plan conversion, but sent a narrowly drawn notice issue back to a lower court for further hearings.
Fred Schneyer
editor
September 03, 2010
Cash Balance Plans Have Risk Mitigation Challenges
Cash Balance Plans Have Risk Mitigation Challenges
September 3, 2010 (PLANSPONSOR.com) – Plan sponsors who move to a cash balance plan from a traditional defined benefit (DB) program may not always realize they are trading interest rate risk for investment risk.
PLANSPONSOR staff
editors@plansponsor.com
August 02, 2010
Monsanto Cash Balance Plan Cleared of Age-Bias Wrongdoing
Monsanto Cash Balance Plan Cleared of Age-Bias Wrongdoing
August 2, 2010 (PLANSPONSOR.com) – A provision in Monsanto Co.'s cash balance pension plan that cut off interest credits once participants reached age 55 did not discriminate against older workers, a federal appellate court has ruled.
Fred Schneyer
July 29, 2010
Preliminary Approval Given to Settlement of WaMu Cash Balance Suit
Preliminary Approval Given to Settlement of WaMu Cash Balance Suit
July 29, 2010 (PLANSPONSOR.com) – A federal judge has given preliminary approval to a $20-million settlement of claims against Washington Mutual concerning its conversion to a cash balance pension plan.
Rebecca Moore
editors@plansponsor.c