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 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, Cash Balance Plans have features that make them more attractive than Traditional Defined Benefit Plans. The chart below provides additional information.

For high-income business owners, a Cash Balance Plan will generally be a better option than a traditional Defined Benefit Plan. Cash Balance Plans are more intuitive and easier to target a cost and track benefits, especially when more than one owner exists. Also, lump sums at payout are not interest rate sensitive. That said, for employers with high turnover, a traditional Defined Benefit Plan could make sense due to the more flexible vesting schedule.

In Summary