Cash Balance Plan? May be worth a look.

November 09, 2021

While you're here, check out  our Cash Balance Plan Music According To Beethoven music video.


A cash balance plan (CB plan) is a type of defined benefit that that looks similar to a defined contribution plan (such as a 401(k)) in that participants have "hypothetical" individual accounts that are credited with contributions and earnings each year.

While cash balance plans appear similar to 401(k)s on the surface, they are defined benefit plans because the benefit is defined by the plan document (as opposed to being dependent on asset performance) and the investment risk is with the employer.


» Contributions may be significantly higher than in 401(k) plans alone

» The benefit is expressed as a lump sum so is easier to understand and communicate

» Benefits can be equalized among participants because they need not be based on age

» Liabilities are generally more predictable

» Employer contributions approximate increase in liabilities each year


“Hypothetical” accounts are established and maintained for each participant in a cash balance plan.
The accounts are hypothetical because assets are pooled in cash balance plans, not divided into individual accounts.

Accounts grow from two sources:

» A contribution credit, and

» An interest credit

The plan’s actuary calculates the contribution by, in part, comparing the value of accounts (using actuarial assumptions and methods, including interest rates prescribed by IRS), to the market value of plan assets. This is what results in the investment risk being with the employer.


Those who need to catch up on retirement savings or would like to increase her nest egg,  may find cash balance plans a desirable option. Generally,  a good candidate for a cash balance plan:

» Is able to contribute more than $70,000 a year, including current retirement savings

» Has a business with a consistent profit pattern and available surplus

» Has the  workforce which is generally younger than the ownership

» Is generally in the 45-60 age range (for businesses without employees, age becomes less of a factor)

» Is willing to contribute five to seven percent of pay to the staff