Cash Balance Plans - How They Work

A Cash Balance Plan is a defined benefit plan that specifies both the contribution to be credited to each participant and the investment earnings to be credited based on those contributions. The account grows annually in two ways: first, a contribution stream and second, an interest credit, which is guaranteed… rather than being dependent on the plan’s investment performance.

These accounts are maintained by the plan actuary, who generates annual participant statements.

Participant accounts grow annually in two ways:

• The company contribution – a percentage of pay or a flat dollar amount – is determined by a formula specified in the plan document, and;
• An annual interest credit. The rate of return is guaranteed and is independent of the plan’s investment performance. That rate changes each year but usually is equal to the yield on 30-year Treasury bonds, which has hovered around 5 percent in recent years.

When participants terminate employment, they are eligible to receive the vested portion of their account balances.