Thoughts or Experiences with Cash Balance Pension Plans

[Bruinguy]

My company is considering implementing a Cash Balance Pension Plan in addition to the existing 401(k) with profit sharing.

From very brief research, it looks like Cash Balance Pension Plans allow for additional money to be saved on a pre-tax basis, potentially a significant amount.  However, it looks like the savings would be managed by the plan and the return would be dictated by the plan (i.e., my funds in the plan would grow at a predefined rate (i.e., 5% or the 30-year treasury rate) each year. 

I assume that the defined growth rate would be conservative and so I'll have to weigh the immediate tax savings against the potential for lower returns.

Does anyone have any thoughts or experiences with Cash Balance Pension Plans?

[reeshau]

Wow, old school!

Will there be an employer contribution to the plan?  Otherwise it sounds like an annuity or the investment side of a whole life plan.

[ysette9]

Try this for info. I don’t have personal experience with one of these plans but I have heard the White Coat Investor mention them on his podcast

https://www.whitecoatinvestor.com/cash-balance-plans-another-retirement-plan-for-professionals/

[jacoavluha]

A cash balance plan is a defined benefit plan. As oppose to a 401k or similar plans which are defined contribution plans.

The fact that the CBP gives you a defined benefit (at a future date) is the reason why the growth rate written into the plan will be quite conservative. Often 3-5% per year. If investments underperform that rate then the company has to contribute more to the plan, so that the targeted future benefit is reached

Typically older participants can defer more income into such a plan than younger participants. Because there are fewer years for the funds to grow to reach their benefit.

The funds in the plan are typically pooled. So you don’t get to pick and choose and change your investments in the plan like a 401k

Often the year to year contribution has to be fixed and can’t be changed on a whim or even year to year like a 401k where you could “turn off or on” your deferrals. Makes sense again if you think about the target of the “defined benefit”

A primary factor in the decision to participate in the plan would be your marginal tax rate. And your need for liquidity.

[ILikeDividends]

What is the fixed income allocation in your AA?

If it is significantly greater than what you would contribute to the plan (and what it would grow into), I would consider some portion of my fixed income allocation as part of this plan. 

I wouldn't make the plan anywhere near my entire fixed income AA simply because #1) it is not liquid, and #2) if 30 year treasuries yield greater than 5% in the future, the pension will underperform*.  IMHO, you'll want to have a significant portion of your fixed income in liquid assets so they can serve an appropriate re-balancing function during large swings in the market.

If you do have a fixed income allocation already, you could shift a portion of that AA into this pension, over time, and free up some cash to put into equities in your other accounts.

* Your OP didn't specifically state whether the pension was capped at a maximum 5%, or whether that was a minimum yield.  My remarks assume 5% is the maximum yield.

[Bruinguy]

Will there be an employer contribution to the plan?  Otherwise it sounds like an annuity or the investment side of a whole life plan.

I don't know whether there will be an employer contribution to the plan yet. 

From what I understand, contributions to the Cash Balance Pension Plan will be deductible, so it will have that benefit over an annuity.  Also, when I retire or leave the firm, I can roll over the cash balance at the time to another plan (i.e., IRA). 

[Bruinguy]

Try this for info. I don’t have personal experience with one of these plans but I have heard the White Coat Investor mention them on his podcast

https://www.whitecoatinvestor.com/cash-balance-plans-another-retirement-plan-for-professionals/

Thanks! Good info.