Cash Balance Plans: An Overlooked Retirement Tool

A cash balance pension plan is a type of defined benefit retirement plan. Here’s how it works.Your employer will pay a fixed percentage of each participating enrollee’s salary to the company’s main pension fund each year. That’s called the pay credit. The company also pays an interest credit. This can be a fixed or variable rate. All would be clearly stated in your Plan Documents.These documents would also state the defined benefit that’s guaranteed to employees at retirement.But unlike with other retirement plans like 401(k)s and IRAs, you can’t contribute to these plans yourself as an employee.The tradeoff is that you bear no risk with this type of retirement savings plan. That risk is entirely on your employer.They must ensure the fund is sufficient to pay the defined retirement benefit to participating plan employees.Cash Balance Pension Plan ExampleLet’s say you enroll in a cash balance pension plan and your salary is $60,000 and the plan’s pay credit is 4 percent plus a 4 percent interest credit.Your employer pays $2,400 to your account (4 percent of $60,000). And that contribution earns a 4 percent interest credit of $96. So the hypothetical balance of your cash balance pension plan account would be $2,496 after the first year.It’s called the hypothetical balance because it’s based on future retirement payments.In most cases, you’d likely need to clear a vesting period. This is the time you must stay with the company before the funds in the account actually become yours. That vesting period is usually from three to five years. So the longer you stay with the company, the more likely you are to vest, and the more likely your account can potentially grow.And because this is a defined benefit plan, an agreed-upon payment in retirement is guaranteed. Your employer must ensure it can meet these payments regardless of investment performance. With that said, your employer decides how to invest the money it contributes to your account.This is different from a 401(k) where you have an investment options menu to choose from.Furthermore, you owe ordinary income taxes on the money that’s distributed to you from the plan.Payout OptionsMost companies allow for a variety of payment options from your cash balance pension plan once you retire or leave the company.You can receive the entire balance in a lump sum. But remember, you’d need to pay income taxes on this distribution. So if the balance is substantial, you may have a heavy tax burden.As an alternative, you may choose an annuity option which provides fixed monthly payments. However, your balance may need to be a certain size to get this benefit.But you can also rollover the balance into an IRA via a direct rollover, without having to pay any income taxes on that event.And some companies let you have a combination of these options. For instance, you can have 30 percent of the balance in a lump sum and rollover the rest into an IRA.But while these little-known retirement saving plans offer several benefits, they also carry some risks.Cash Balance Pension Plan DisadvantagesYou can’t contribute directly to a cash balance pension plan, which could limit potential growth. And you have no control over how that money is invested. But on the upside, this means you virtually take no risk and your payments are guaranteed.Nonetheless, you’d owe taxes on the distributions. So you need to think carefully about how you plan to make those withdrawals. A qualified financial adviser can guide you through your options.The Bottom LineA cash balance pension plan can be a relatively low-risk retirement savings option which offers guaranteed payments.But that doesn’t mean it’s your only option. If your company offers a cash balance pension plan, it likely offers a 401(k), too. Because of its exceptionally high contribution limits, a 401(k)’s growth potential is arguably greater. And you can also open a traditional or Roth IRA via an investment management company to further boost your retirement savings. In fact, you can roll over your cash balance pension plan funds into an IRA at retirement or when you leave the company.But careful consideration must be taken when deciding how to receive your payouts due to the tax liability.The Epoch Times copyright © 2026. The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.