Home  >  Financial Articles and Q&A  >  How does a Cash Balance Plan differ from a 401(k)?

How does a Cash Balance Plan differ from a 401(k)?

I've seen them mentioned in articles, but I'm not really sure how it works or if it could help me.

Nov 24, 2014 by Michael from St Louis, MO in  |  Flag
4 Answers  |  5 Followers
Follow Question
4 votes

Cash Balance plans and 401(k)'s are completely different animals. Without getting into all of the technical details, a Cash Balance Plan is much more like a traditional pension (defined BENEFIT plan). In exchange for regular monthly or annual contributions from an employer, the participant is given a guaranteed stream of income in retirement (pension/annuity). The technical aspects of a Cash Balance Plan are a bit different than a traditional defined benefit pension (such as crediting method and portability), but are very similar in most respects.

A 401K, on the other hand, is a defined CONTRIBUTION plan, where the employee and/or employer make regular monthly and/or annual contributions to an employee-directed 401K account that is completely portable (once vested).

Comment   |  Flag   |  Nov 24, 2014 from Mystic, CT

1|600 characters needed characters left
4 votes
Peter C. Karp Level 20

Michael

Many business owners and partner of firms are looking for larger tax deductions and accelerated retirement savings. A cash balance plan may be the perfect solution for them. A cash balance plan is a type of IRS qualified retirement plan known as a “hybrid” plan. In a cash balance plan, each participant has an account that grows annually in two ways: first, an employer contribution and second, an interest credit, which is guaranteed rather than dependent on the plan’s investment performance. The plan assets are pooled and invested by the trustee or investment manager. If the plan’s investment earnings exceed the guaranteed rate, the excess will be used to reduce future employer contributions. This will not affect the amount that is credited to the participant’s account. Conversely, if the plan’s investment earnings are less that the guaranteed rate, then future employer contributions will be increased. As one of the other advisors mentioned, offering a cash balance plan is decided by the employer and is typically integrated with an existing 401(k) profit sharing plan. If you are a business owner and would like to know more about how this type of plan could be of benefit to you and your company please give me a call to discuss.

Disclosure: The posted information is for informational purposes only. This message does not constitute an offer to sell or a solicitation of an offer to buy any security. All opinions and estimates constitute Karp Capital's judgment as of the date of the report and are subject to change without notice. Accordingly, no representation or warranty, expressed or otherwise, is made to, and no reliance should be placed on, the fairness, accuracy, completeness or timeliness of the information contained herein. Securities offered through Infinity Securities (a registered broker-dealer, member FINRA, SIPC). Infinity Securities and Karp Capital Management are not affiliated companies

Comment   |  Flag   |  Dec 04, 2014 from San Francisco, CA

1|600 characters needed characters left
0 votes
Larry R Frank Sr Level 20

Yes, retirement plans can be confusing! A cash balance plan looks much like traditional pensions your grandparents got (today, these are generally in government and teacher jobs). But, the largest difference is that a cash balance plan may be transferred into an IRA once you leave the employer; traditional pensions may not be transferred to an IRA.

Here's a nice short article that has different pages to explain these more http://money.cnn.com/retirement/guide/pensions_cashbalanceplans.moneymag/index.htm. This link is good because it answers other questions you haven't thought to ask yet!

When it comes to retirement plans through your employer ... keep in mind YOU don't have much choice other than to pick from any options the employer may give you. The employer is really the one who decides what kind of retirement plan employees will be offered.

Your decision is really what might you do outside of an employer provided plan to improve your savings for retirement (assuming you're taking maximum advantage of the employer plan for contributions from you if that's an option ... this is a choice between an IRA or ROTH IRA. Anticipating your next question - what's the difference between those ... http://money.cnn.com/retirement/guide/IRA_Basics.moneymag/index2.htm

I hope this has helped you. If not, you could find a fee only planner who would work in your interest (not selling products) through the Find and Adviser function at http://www.napfa.org/ .

Comment   |  Flag   |  Nov 24, 2014 from Roseville, CA

1|600 characters needed characters left
0 votes

At the risk of oversimplifying, here are the key differences: In a 401K you decide how much you will contribute and the amount that you accumulate is dependent on the investment returns you achieve as a result of the investment choices you make in the plan..in other words, the risk of reaching your goal is on you. A cash balance plan is essentially the reverse. The employer promises that a certain amount will be available to you when you retire. Each year the employer determines a pay credit and an interest rate credit that will be applied to your account to achieve that objective. But it is the employer who assumes the risk of making up any shortfall.

Comment   |  Flag   |  Nov 24, 2014 from Fort Washington, PA

1|600 characters needed characters left