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Coming soon: a cash balance plan

By Jennie L. Phipps ·
Wednesday, December 15, 2010
Posted: 2 pm ET

If your employer offers you a cash balance retirement savings plan, snap it up. It can provide valuable retirement planning stability as well as portability.

Cash balance retirement plans are a hybrid mix of old-fashioned pension plans and 401(k)s. Kevin Wagner, senior retirement specialist in the Atlanta office of consultancy Towers Watson, says most companies that offer cash balance retirement savings plans to their employees set them up this way. The employer deposits somewhere between 3 percent and 10 percent of an employee's salary into the plan annually and guarantees that the money in that account will earn a set percentage of interest -- usually, it's pegged to the 30-year U.S. Treasury rate. This ensures stability. As Wagner says, "A cash balance account is like a rock. It isn't going away; it isn't going to decline. People with cash balance accounts didn't lose a penny during the financial crisis in 2008."

At the same time, employees are offered a standard 401(k) to which they, and usually the employer, contribute. The average match is about 3 percent of salary. Wagner says the average employer kicks in a total of 9 percent of salary toward an employee's retirement.

Wagner outlines the best features from an employee standpoint:

Built-in balance. The employee can afford to invest a significant amount of his 401(k) in equities because the cash balance plan is totally invested in fixed income. That increases the likelihood that he'll be able to take advantage of any significant rise in the stock market without heavy losses when the market heads south.

No leaving money behind. When an employee quits, his retirement money can either stay with the company managing his cash balance plan or he can roll it over into the new employer's plan or into an IRA.

Retirement security. The era of guaranteed pensions is almost gone, but a cash balance plan combined with a lifetime annuity or, perhaps, a ladder of treasuries can provide the same dependable lifetime income.

From an employer's point of view, Wagner says, cash balance plans provide incentive for employees to stay, but remove the balance sheet risk that comes with a traditional pension.

Cash balance plans have been very attractive for owners of small businesses and the self-employed because they offer the opportunity to shelter a significant amount of income from taxes. But big companies are hopping on the bandwagon. Watson says 25 percent of Fortune 100 companies currently have cash balance plans, and that number is increasing since the IRS recently spelled out details that had previously been unclear.

"Cash balance plans offer stability," Wagner says, "And both employers and employees value that."

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December 21, 2010 at 2:11 pm

AT my current job, my employer puts a cash contribution into my 401(k) each payday. That is the company retirement plan. I also contribute to the 401(k) and the company also matches some of my contribution. No vesting period required. Once the money goes in it belongs to me. I always know exactly how much retirement money I have accumulated. At retirement I will be the one to determine how to make the money last. No need to worry about the company going bankrupt at some future date and taking the retirement plan down with it, or underfunding my pension.

To ensure a comfortable retirement, I am required to take responsibility, and I find that I like having that control.

Tough Love
December 16, 2010 at 11:14 pm

For those who intend to be in the Plan for a just a few years, the limited but guaranteed yield (30-yr treasury) may be attractive, but for the long haul (as your primary retirement investment vehicle) is stinks ... you need to be heavily in equities, real estate, etc.

Yes, its true that ..."People with cash balance accounts didn't lose a penny during the financial crisis in 2008."

But it's ALSO true that a Cash Balance Plan would have generated only a quarter of equity-investment gains throughout the 1990s.

Employers love them, because THEY invest Plan assets primarily in equities but pay out the lower 30-yr treasutry rate. It's called arbitraging against your own employees. Also, since it's technically a Defined Benefiit Plan, all contributions made for those who terminate before vesting (say 5 years) revert to the company. Under a 401K Plan ALL contributions stay with the employee.

Unless you investing like a dope, a 4501k Plan (with the same company contribution) is a MUCH better choice FOR THE EMPLOYEE.

Clay Leslie
December 15, 2010 at 3:53 pm

Hey..., raising the age to 65 seems ok for those people who type at a keyboard or work behind a desk in a cozy little office all their career. What about the poor smuck who actually has worked his tail off for fourty five or fifty years at hard manual labor in the heat and especially the cold? Ever stand a 12am to 6 am watch on the deck of a ship in 10 degree weather or wire an unheated house under construction in a Michigan January? Do it for fourty or fifty years and then come back and tell me they don't deserve every penny of an early retirement. Elitist!

A lot of people are all used up well before 65.