Tags: Retirement | retirement | cash balance | plans

Cash Balance Retirement Plans and Your Retirement Planning

By    |   Thursday, 11 June 2015 03:01 PM

The U.S. Department of Labor describes two types of cash balance retirement plans: those with defined benefits and those with defined contributions.

According to Investopedia, cash balance retirement plans are pools of money that are invested over time. Defined benefits plans promise a specific amount of money at retirement for an employee regardless of the gain or losses of the account. Defined contribution plans specify how much the employer will contribute to the retirement plan, with the final benefit being subject to gains and losses of the account.

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The Pension Benefit Guarantee Corporation (PBCG) is a federal agency that helps to insure pension plans. Cash balance retirement plans with guaranteed payments are protected by the PBCG. Since 1974, the Employee Retirement Income Security Act continues to pay employee pensions even after the original employers cannot. Financing for these plans is provided through insurance premiums.

Cash balance retirement plan benefits are paid out based on a stated account balance, compared with traditional pension plans that are based on a monthly payment amount, the Department of Labor said.

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Cash balance plans have several differences from 401(k) retirement investments. The main difference is that the risk lies with the employer rather than the employee with cash balance retirement planning. These plans also area guaranteed by the federal government. In contrast, the 401(k) plan relies on an employee’s voluntary contribution. The risk of that investment rests with the employee, not the employer. The 401(k) retirement also does not have a lifetime payout.

Kiplinger reports that cash balance plans are different from traditional pensions in that there is a total account balance in the plan, rather than simply a promise of a certain monthly income at retirement.

The big advantage of the cash balance plan over a 401(k) is that the contribution limits are much higher, up to $200,000 annually for someone older than 60 years. This has made cash balance plans very popular for small business owners. Those are pre-tax dollars, which can translate to a huge savings for those close to retirement. A disadvantage is the way the final dollars are figured. Pension plans are usually figured by the highest salary years. Cash balance plans consider all years, even those when employee salaries may have been low.

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The U.S. Department of Labor describes two types of cash balance retirement plans: those with defined benefits and those with defined contributions. According to Investopedia, cash balance retirement plans are pools of money that are invested over time.
retirement, cash balance, plans
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2015-01-11
Thursday, 11 June 2015 03:01 PM
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