Edwin, a Cash Balance plan is a form of Defined Benefit plan. They are both employer funded. However a traditional Defined Benefit Plan will state your benefit as a monthly payment at retirement. A Cash Balance plan will define your benefit as a ‘stated balance’ which you can elect monthly payments at retirement, but you can also take a full distribution. It is similar to a 401(k) for distribution purposes, and is considered by some to be a hybrid between a Defined Benefit plan and a 401(k).
A Defined Benefit plan will typically use a formula for calculating your benefit that includes age, time of service and pay. A Cash Balance plan will determine present value based on pay and time of service, and age to a lesser extent. If the impetus to your question has to do with an employer making a conversion from a Defined Benefit to a Cash Balance plan, if you are an older employee, you may be adversely affected by this change. The employer has some flexibility on formulas used. If you are being adversely affected, take heart in the possibility that if your employer was unable to convert to this less costly plan, the alternative may have been termination of the plan.
Both of these plans use complex actuarial formulas and it is difficult to tell which one will provide a better benefit. There is a tendency for the older employee to get a richer benefit on the Defined Benefit plan. One large advantage to a Cash Balance Plan is you can take your vested money with you as a lump sum. Either way, this is all employer funded, and you win either way.
Please read my Financial Guide What is a Cash Balance Plan for more info on Cash Balance Plans. Also you can review FAQ’s at the United States Department of Labor
In order to answer your question you need to have an understanding of the two plans. The following are the basics of understanding a cash balance plan.
A Cash Balance plan is a defined benefit plan that specifies both the contribution to be credited to each participant and the investment earnings to be credited based on those contributions. Each participant has an account that resembles those in a 401(k) or profit sharing plan. Participant accounts grow annually in two ways:
1) The company contribution – a percentage of pay or a flat dollar amount – determined by a formula specified in the plan document, and;
2) An annual interest credit. The rate of return is guaranteed and is independent of the plan's investment performance. That rate may either be a fixed rate over the life of the plan or may change each year but usually is equal to the yield on 30-year Treasury bonds, which has hovered around 5 percent in recent years. The interest credit is always positive. The interest credit is not related to the actual performance of the Plans assets.
When participants terminate employment, they are eligible to receive the vested portion of their account balance. Cash Balance contributions are age-dependent.
A defined benefit plan will describe all benefits in terms of an annuity payment at retirement and not a lump sum benefit. Although the exact amount of what this is worth today (as a balance) can be estimated, it is never a fixed amount and an actuary will not give you a fixed number that you can hang your hat on.
The fundamental difference is in regard to the participant's understanding of the Plan and what shows on the statements. Simply....a cash balance Plan is a DB plan where the statement can be easily read and understood. Be sure to consult with a qualified retirement plan advisor to determine the best options for your specific situation.
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A defined benefit plan provides a specific benefit for an eligible employee at retirement. It's generally what you think of when you hear the term company pension.
A cash balance plan is a type of defined benefit plan. A cash balance plan is one which the plan provides you a certain percentage of return every year, giving you a theoretical cash balance or amount at your retirement.
Alternatively, there are defined contribution plans, such as 401ks and SEPs.
The Department of Labor has a good explanation here: http://www.dol.gov/dol/topic/retirement/typesofplans.htm
If you're going to work for an employer until you retire, then a defined benefit plan is a good thing; you'll have a pension income after you retire, which reduces your income risks in retirement.
If you are going to move from employer to employer, then a defined contribution plan is generally better, as these are portable, and you don't lose the benefits of your contributions as you change jobs.
Of course, this is VERY GENERAL advice. You're best off seeking the counsel of a qualified financial advisor.
Best of luck in your retirement planning!