The Pros And Cons Of Cash Balance Plans Kenny Phan Share With so much talk of the demise of defined benefit retirement plans, many people are surprised to learn that there is one type that is growing faster than even k plans. Could your clients and their companies benefit from sponsoring a cash balance plan?
Social Good and Business: The Winning Formula Such a ruling could send a chill through the large slice of Corporate America that offer such plans, which are reportedly a good deal less costly to run than the defined-benefit plans that many of them replaced. Indeed, some experts believe that a decision that goes against IBM could be the death knell for cash-balance plans overall, according to press reports.
Sinceabout one-fifth of large companies have converted their traditional defined-benefit pension plans to cash-balance plans, according to The New York Times. Altogether, there are more than 1, U.
Traditional defined-benefit pension plans offer retirees a monthly check for life based on their salary and the number of years they worked for the company.
In cash-balance plans, by contrast, companies set aside a specific sum for each worker and guarantee that a minimum interest rate will be earned, the Times explained. The reason this structure is thought to favor younger workers is that they would have more time to enjoy the benefits of compounding interest.
If a company switches to a cash-balance plan from a traditional defined-benefit plan, on the other hand, a year-old worker could ultimately collect half of the retirement benefits he or she would have collected, according to the newspaper.
Such structures are popular with companies offering traditional defined-benefit pensions because cash-balance plans can help them shrink their long-term pension debt while still providing retirement benefits, the Times reported. District Court in the Southern District of Illinois ruled last February that IBM owed compensation to roughlycurrent and former workers as a result of the switch to the cash-balance plan, according to Reuters.
For its part, IBM contended that its cash-balance plan enables employees to interest credits at the same rate regardless of their age.Prior to the merger of BankAmerica Corp.
and NationsBank Corp. that formed Bank of America, each of the predecessor banks had converted its traditional pension plan to a cash-balance plan. A cash balance plan is a defined benefit retirement plan that maintains Cash balance plans are defined-benefit plans that look like defined-contribution plans.
that the lump sum calculation for workers terminating service prior to retirement who were covered by the defendant cash balance pension plan cannot violate the rules for defined. 5 all U.S. workers a choice of remaining in the old plan or joining the new one (Schultz, Auerbach and Burkins, ).
In , SmithKline and Aetna converted to cash-balance pension plans.
“One reason why companies want to look at a cash-balance pension plan is that they already have a pension plan, but they feel it isn’t appreciated by the work force because of a high-turnover environment,” says Daniel H.
Carlson, a benefits consultant for Buck Consultants Inc. in Chicago. A cash balance plan is a defined benefit plan sponsored by the employer.
The plan promises to provide a monthly benefit to participants.
The benefit is either a percentage of compensation, or a stated dollar amount at retirement age (which is stated in the plan document).
This a 1 hour course is a beginner’s look at Cash Balance Pension Plans. The emphasis is upon the process of arriving at a solution for employers to reduce income taxes and retain earned income.
For further information, or to reserve a spot, contact Bob Evenden at.