Are Cash Balance Plans Making a Comeback?

States are looking at legislation that will allow cash balance plans for state worker retirements. While many are in favor of this type of retirement planning, critics are concerned that cash balance plans do not provide sufficient retirement security. Furthermore, there is some concern they could negatively impact state finances.

Cash Balance Plans

Cash balance plans are like traditional pension plans in that they give employees an option to get a lifetime annuity payment. Unlike a pension plan, however, a cash balance plan creates a separate account containing a specified lump sum for each employee. This method offers potential savings for the entity funding the retirement plan because the balance is spaced over the length of an employee’s career rather than calculated based on the final few years of higher wages. Many governments decided to move towards cash balance plans when state pension plans began to have issues.

Cash balance plans differ from 401(k) plans because the amount of money in the plan is defined and not tied to market performance the way a 401(k) plan is. This, by definition, makes a cash balance plan a defined benefit plan, allowing the plan to offer an annuity option that a 401(k) plan cannot.

A Solution for State Pension Woes?

Some states with struggling pension plans have chosen to convert to cash balance plans to gain the benefits of both a defined benefit plan and a defined contribution plan. With a traditional pension plan, the employee has a clear formula they can use to define their monthly retirement income. With a defined contribution 401(k)-style plan, while contributions are clearly defined, the amount of money available for retirement depends upon market performance and the subsequent return on investment. The cash balance plan leverages the advantages of both types.

While rare, the popularity of cash balance plans is growing. There are few plan designs aimed at combining the best of pensions and 401(k)s. Employees are given plan accounts in which their benefits accrue as they are paid. The benefits are generally a percentage of the employee’s salary. Employees also earn interest on the money in their plan which effectively increases their compensation. The annual interest credit is guaranteed regardless of stock market performance.

Critics argue that these plans favor shorter-term employees rather than the longer-term employees traditional pension plans favored because of the way the plan is spread over the lifetime of the individual’s employment and grows at the same rate over time. Experienced counsel can help weight the pros and cons of a cash balance plan and suggest alternatives if it’s not the right fit for a particular plan sponsor.

Reviewing benefit plans and helping businesses decide which option is best for their needs is just one aspect of what the ERISA attorneys at Hall Benefits Law handle for clients. Give us a call at 678-439-6236 today, or visit the Hall Benefits Law website to learn more.

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Hall Benefits Law, LLC

HBL offers employers comprehensive legal guidance on benefits in mergers and acquisitions, Employee Stock Ownership Plans (ESOPs), executive compensation, health and welfare benefits, healthcare reform, and retirement plans. We counsel a wide spectrum of clients including small, mid-sized, and large companies, 401(k) investment advisors, health insurance brokers, accountants, attorneys, and HR consultants, just to name a few. HBL is passionate about advising clients, and we are dedicated to our mission: to provide comprehensive, personalized, and practical ERISA and benefits legal solutions that exceed client expectations.

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