Cash Balance vs Traditional Defined Benefit

How They Stack Up

Predefined monthly benefit, which is generally a percentage of pay; may be converted to a lump sum value at distribution.

Hypothetical account based on predefined annual pay credits and interest credits; conversion to lump sum value not needed.

Older employees cost more for a given level of benefit. Makes it difficult to target a cost for a given owner or partner.

Cost is not age sensitive for a given level of benefit. Makes it easier to target a cost for a given owner or partner.

Lump sum distribution is interest rate sensitive and difficult to predict.

Lump sum distribution is not interest rate sensitive and easier to predict.

Benefit and contribution may change drastically based on recent compensation.

Recent compensation has smaller impact on benefit level.

Vesting schedule is more flexible; generally can choose 3-year cliff or 6-year graded schedule. May result in lower cost.

Vesting schedule is less flexible; 3-year cliff is the only option. May result in higher cost depending on turnover rates.

Monthly benefit structure may be more difficult to understand.

Account balance structure is usually easier to understand.

Traditional Defined Benefit Plan

Cash Balance Plan

A Cash Balance Plan is a type of Defined Benefit Plan. Similar to Traditional Defined Benefit Plans, Cash Balance Plans have high contribution limits ($100,000 to $250,000+). However, depending on the business, Cash Balance Plans may have features that make them more attractive than Traditional Defined Benefit Plans. The chart below provides additional information.

For one-owner or owner/spouse businesses, a Traditional Defined Benefit Plan generally will be a better option than a Cash Balance Plan. Traditional Defined Benefit Plans generally allow more front-loading of contributions, and the advantages of a Cash Balance Plan do not usually apply to a business with no other business partners or employees.

On the other hand, Cash Balance Plans are more intuitive. They allow businesses to more easily target and track partner costs and benefits, which is important for multi-partner businesses. Also, Cash Balance Plan lump sums at payout are not interest rate sensitive. This makes the payout of employees at Plan termination more stable and predictable. However, for employers with high turnover, a traditional Defined Benefit Plan could make sense due to the more flexible vesting schedule.

In Summary

May allow for more front-loading of contributions than a Cash Balance Plan.

May not allow as much contribution front-loading as a Traditional Defined Benefit Plan.