retirement

Your pension when the unexpected happens

What if pension becomes a cash balance plan?
What if pension becomes a cash balance plan? © AlesL/Shutterstock.com

Cash balance plans are increasingly popular among both small and large companies, says Alexander Pekker, author of a recent report on these plans for management firm Sage Advisory Services.

With a cash balance plan, the employer commits to putting a "pay credit," or a percentage of each employee's pay, into the plan annually. It can be somewhere between 5 percent and 10 percent. An "interest credit," based on a predetermined market rate, is also applied. The employee doesn't contribute directly.

Pekker predicts that more large companies will convert to this form of pension because it caps company risk. "Conversions in large organizations give these companies greater predictability, less investment risk and less longevity risk," he says.

The most common situation, Pekker says, involves converting employees' accrued defined benefits to a plan with an account balance, much like a 401(k) plan.

"You are guaranteed the larger of the cash balance or the older defined benefit plan up to that point," Pekker says. "You aren't going to lose anything you have been guaranteed so far, but the new cash balance plan will probably be less generous than the old plan."

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