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Cash Balance Pension Plans

In general, cash balance pension plans are similar to defined contribution plans in that an employer annually credits the retirement account of his or her employee. When the employee reaches age 65, he or she is entitled to cash benefit benefits (making the cash balance pension plans a defined benefit plan) in the form of a cash balance deposited in your pension account.

At the time of retirement, individuals can accept annual payments for the rest of their lives in the form of a lifetime annuity (usually around 10% of the pension account balance per year) or alternatively choose a fixed benefit for the pension complete. account balance. Many plans include the option for people to take a lump sum by leaving work before age 65.

The main difference between these retirement vehicles and traditional pension plans refers to the distinctions made in the definition of benefits. While the regular benefits of the pension account will be represented as specific payments in the perpetual individual pension account (starting at retirement age), cash balance plans simply define the benefit as an account balance (does not reflect the actual contributions and how this is “hypothetical” by nature until the time of retirement. You should learn what are some main cash balance plan pros and cons.

Unlike the 401 (k) plan, employees are not required to participate with a cash balance plan because they are benefits received from an employer. Because of this, only the employer assumes the risks / rewards of the cash balance plans, regardless of the employer’s profit / loss, an individual has promised a fixed amount to his pension account will always be entitled to the agreed upon retirement amount. . This is a fundamental difference from the 401 (k) and traditional plans, as individuals have more control and responsibility over risk and rewards management.

Guaranteed by the federal government, cash flow plans are insured by bodies such as PBGC, which has the power to intervene to act as fiduciaries of any canceled or underpaid defined benefit plan. Defined contribution plans (such as a 401 (k) plan) do not benefit from this federal guarantee.

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