Cash Balance Pension Plan

A cash balance pension plan is a type of defined benefit plan in which the employer makes contributions to the employee’s account and guarantees a specific rate of return, regardless of the profitability of the plan’s investments.  The employer generally makes investment decisions concerning the holdings of the plan and bears the risks of investment.

Each year, the employee receives a pay credit that is proportional to a percentage of the employee’s salary and an income credit that is a fixed rate of return.  The employer defines this retirement benefit as an account balance, and a cash balance pension plan will often allow an employee to choose between an annuity and a lump-sum payment.