Third Party Administrator
in Vero Beach, FL

Cash balance plans are a type of employer-sponsored retirement plan that combines elements of both traditional defined benefit plans and defined contribution plans. Here’s how they work:

1. Employer Contributions: In a cash balance plan, the employer contributes a certain percentage of an employee’s salary to their individual account each year. These contributions are typically based on a percentage of the employee’s compensation.

2. Interest Credits: Unlike traditional defined contribution plans where the account balance fluctuates based on investment performance, cash balance plans guarantee a minimum rate of return. This rate is often tied to a fixed interest rate or a predetermined index. The account balance grows each year through employer contributions and interest credits.
3. Account Growth: Over time, the employee’s cash balance account grows as more contributions are added and interest credits accrue. The growth is predictable and not dependent on the performance of specific investments chosen by the employee.
4. Portability: Cash balance plans offer portability, meaning that employees can usually take their cash balance accounts with them when they leave the company. They can either roll over the funds into another retirement account or leave them invested in the cash balance plan, depending on the plan’s rules.
5. Distribution Options: When employees reach retirement age or become eligible to receive distributions, they can typically choose between different distribution options. These may include receiving the money as a lump sum, converting it into an annuity, or taking periodic payments over time.

Cash balance plans are often favored by employers because they provide more predictability in terms of retirement benefit costs compared to traditional defined benefit plans. They also offer employees a guaranteed retirement benefit that is not subject to market fluctuations, while still providing some flexibility in terms of investment options and distribution choices.