What is a cash balance plan? Is there a difference between a defined benefit plan and a defined contribution plan? Are cash balance plans better than 401(k) plans? The team at Pension Investors Corporation of Orlando can help answer all these questions and more.
What Is a Cash Balance Plan?
First, what is a cash balance plan? A cash balance plan is a type of pension plan that defines a benefit by way of an account balance. This is a bit of an oddity since a cash balance plan is a defined benefit plan that is more closely attributed in performance to a defined contribution plan. Which leads to the next logical question: What is the difference between the two?
While a defined benefit plan and a defined contribution plan are both types of retirement plans, there are indeed differentiating factors between the two. For instance, in a defined benefit plan, it is the employer who sets aside money for the employee. On the other hand, many defined contribution plans have built-in 401(k) deferrals that allow for a portion of the employee’s pay to go into savings. As you can imagine, the defined benefit plan is the more appealing option for an employee while being a bit of a risk for the employer.
Is a Cash Balance Plan Beneficial?
So then, is a cash balance plan more beneficial than a 401(k)? It really depends on who is asking the question. However, cash balance plans are becoming a complementary option. Plan design is critical for the success of any defined benefit program. Recent statistics show a resurgence of defined benefit plans in 2001, a more recent analysis states that they make up 28% of defined benefit plans today. In fact, the numbers that are being reported are rather impressive. For instance: “31% of cash balance plans have assets over $1 million,” according to an article put out by ASPPA Net.
If you have questions or would simply like to learn more about cash balance plans or your other options, get in touch with the team at Pension Investors Corporation today!