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Learning, Sharing, and Teaching => Investor Alley => Topic started by: Honest Abe on May 05, 2013, 07:58:44 PM

Title: "Cash Balance" Retirement plan
Post by: Honest Abe on May 05, 2013, 07:58:44 PM
Just read this article about a "new and wonderful" replacement for 401k's. (

My first reaction is: Ummmmm, isn't this just an annuity? My second reaction is: this sounds like some BS that Wall Street came up with to hose the average worker.
Title: Re: "Cash Balance" Retirement plan
Post by: Bill76 on May 05, 2013, 08:23:33 PM
We have this where I work, in addition to the 401k.  It is basically an annuity, but I look at it as free money, since I don't have to contribute to it.  It would definitely suck as a replacement for the 401k.
Title: Re: "Cash Balance" Retirement plan
Post by: Honest Abe on May 06, 2013, 08:50:44 AM
I wonder what the fees are and more importantly, WHY NOT JUST CALL IT AN ANNUITY? I think the answer is that people know that annuities suck and the financial firms know that they love them and make buttloads of money off them.
Title: Re: "Cash Balance" Retirement plan
Post by: tooqk4u22 on May 06, 2013, 12:42:26 PM
My first reaction is: Ummmmm, isn't this just an annuity?

Yes, kind of - they have been around for a while and are supposed to be a portable pension.  I had one at my last employer, along with a 401k, and when I left I rolled the balance into my IRA Rollover account. 

Pensions are not portable and technically are also annuities - although you wouldn't know it as they have been thoroughly mismanaged, underfunded, and accounted for with methods that are borderline criminal for both private and public sectors (but moreso public).

Anyway as they typically set up they are too conservative and contributions are small, but for me it I will take whatever they will give.
Title: Re: "Cash Balance" Retirement plan
Post by: Joet on May 06, 2013, 12:42:37 PM
I like how the contribution limits arent artificially capped at 17.5k though, and I dont see any restrictions on what you can invest in, either. unless I'm mistaken its not really an annuity [although you could select such an option in this plan if desired]

seems like you can shelter a whole buttload more $$/annually with such a plan than a 401k [for most people, even beyond the $51k current deferred compensation limits. That article has an example of sheltering $150k of a $400k income. Awesome.
Title: Re: "Cash Balance" Retirement plan
Post by: On_a_slow_boat on May 15, 2013, 01:44:16 AM
I would not really think of a cash balance plan as an annuity. It really is a "balance of cash" provided by your employer.

The plans typically work like this.  During the year your account gets 2 credits. 
1 - Benefit credit: equal to some percentage typically based on (age and/or service) x (your salary)
2 - Interest credit: equal to some stated rate (30year treasury is common) x your balance at the beg of year + benefit credits within the year

So your "cash balance" goes up every single year.

the keys are this - it is very different from 401k in the sense that the employer takes all the investment risk. If the underlying assets over or under perform is not relevant to your benefit amount. You receive the interest crediting rate. Though a poor asset performance could lead to the plan underfunding....and possibly the employer bankruptcy and the PBGC stepping in.

As a cash balance plan is a Defined Benefit as opposed to a Defined Contribution plan. ERISA requires that participants be given the option to take an annuity, however the vast majority of these plans the people almost always take the cash lump sum at retirement.

About this article. I think the misleading thing is # of plans is not a good way to look at retirement savings in the USA. Huge corporations that employ thousands of people are freezing and closing Defined Benefit plans. They just don't want the costs and investment/longevity risk. I would bet that the majority of these new cash balance plans are very very small firms like lawyers / doctors offices who are using the higher annual benefit amounts to accumulate large pre-tax retiree savings through thier company and the plans are primarily benefiting a small number of well paid EE's. That being said, ERISA does have rules that help to ensure the lower level employees at these firms benefit as well.

I suspect the majority of the larger plans are from companies that use to give employees traditional pensions and have replaced that pension with a cash balance for employees on or after a certain date of hire. The benefits are typically smaller and the investment/longevity risk is less than traditional plans.

I know my comments are coming off as a bit "glass half empty", so I'll just say for the record I am a huge fan of these plans. For those 11 million employees, these plans are a great benefit to employment with that company, and should be considered when evaluating your total compensation.