what is a cash balance pension plan 
a cash balance pension plan is a defined benefit pension plan with the option of a lifetime annuity the employer credits a participant s account with a set percentage of their yearly compensation plus interest charges for a cash balance plan the funding limits funding requirements and investment risk are based on defined benefit requirements changes in the portfolio do not affect the final benefits received by the participant upon retirement or termination and the company bears all ownership of profits and losses in the portfolio 1understanding cash balance pension plansa cash balance plan cbp is maintained on an individual account basis much like a defined contribution plan this means it isn t like the regular defined benefit plan instead the cash balance pension plan acts just like a defined contribution plan because changes in the value of the participant s portfolio do not affect the account balance promised by the employer the features of cash balance pension plans resemble those of 401 k plans investments are managed professionally and participants are promised a specific benefit at retirement however the benefits are stated in terms of a 401 k style account balance rather than the terms of a monthly income stream 1for instance an employee on a cash balance pension plan might receive a promise of 5 of their salary with a 5 interest credit if they made 100 000 annually they would receive a pay credit of 5 000 plus 5 interest paid on the account balance as the number of years at the employer increases the account balance grows to meet the balance promised by the company at retirement the employee can choose a lump sum or monthly annuity payment the benefits of individuals participating in private sector pension plans are protected by federal laws such as the employee retirement income security act erisa 2cash balance pension plan vs traditional pension planthe most significant difference between a cash balance pension and a traditional pension plan is that the traditional plan generally uses the last few years of your highest compensation to determine your monthly benefit a cash benefit pension plan uses the total number of years you re with the company and is designed to have a predetermined amount in the account by retirement cash balance pension plan vs 401 k besides the contribution limits the most significant difference between the cash balance pension and a 401 k is that the employer bears the investment risk in a cbp the employer is responsible for ensuring the employee receives the amount promised so no matter what happens it must ensure the employee gets that amount people 60 years and older can sock away well over 300 000 annually in pretax contributions 34in a 401 k the employee bears the investment risk because they are the ones that choose the way the plan invests the employer has no investment risk because they give employees money to invest as they see fit additionally the retirement benefit amount depends on the balance of the account advantages and disadvantages of a cash balance pension planwhile this type of plan does have several benefits there are some disadvantages to consider as well lump sum payoutsrollovertax deferredno contribution limittaxable distributionsno employee contributionshigh cost to maintainspecial considerationscombining a cash balance and a 401 k pension plan can help you slash your tax bills and bolster your nest egg because you legally have two retirement plans 