Employers that give defined benefit pension plans to employees don't necessarily have to use traditional pensions. Some offer cash balance solutions as an alternative or may switch to this option from a pension. What is a cash balance plan and how does it work?
What is a Cash Balance Plan?
These are types of defined benefit plans. This means that, like a pension, the responsibility for saving for retirement falls with the employer and not the employee. The regular savings made on behalf of the worker will create an annuity income and/or lump sum payment for retirement. The way that money is allocated into a cash balance plan to build funds for the future is, however, different than the way it might be used to create a pension.
How Do Cash Balance Retirement Plans Work?
An employer that offers a cash balance plan will make credit payments based on a percentage of a qualifying worker's salary each year. This is typically set at around 5%. In addition, they will also add an interest credit on top of the base contribution. This is usually linked to a specific index rate and can be given on a fixed or variable basis.
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