Third Party Administrator
in Athens, GA

Cash balance plans are a type of retirement savings plan that combines features of both traditional defined benefit plans and defined contribution plans. In a cash balance plan, employers contribute a percentage of each employee’s compensation into an individual account. These contributions typically grow at a fixed interest rate or a rate tied to an investment index.

Here’s how cash balance plans work:

1. Employer Contributions: Employers contribute a specified percentage of each employee’s compensation into their cash balance account. This contribution is usually based on a percentage of the employee’s salary.
2. Interest Credits: The contributions made by the employer earn interest credits, which are typically based on a predetermined interest rate or a rate tied to an investment index, such as the return on long-term Treasury securities.
3. Account Growth: The employee’s cash balance account grows over time as contributions are made and interest credits are applied. The growth is not tied to the performance of specific investments chosen by the employee, as in a traditional defined contribution plan like a 401(k).
4. Portability: One advantage of cash balance plans is that they are portable. When employees leave the company, they can typically choose to roll over their cash balance account into another retirement plan, such as an IRA or a new employer’s retirement plan.
5. Distribution Options: When employees reach retirement age or become eligible to receive distributions, they can typically choose between receiving the money as a lump sum or as periodic payments, similar to an annuity.

Cash balance plans are attractive to both employers and employees for several reasons. For employers, they offer more predictability in terms of retirement benefit costs compared to traditional defined benefit plans. For employees, they provide a guaranteed benefit that is not subject to market fluctuations, while still offering some flexibility in terms of investment options and distribution choices.