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."