What defines a cash balance plan?

A cash balance plan is defined in terms of a stated account balance, which is a distinctive feature of this retirement plan type. Unlike traditional defined benefit plans, which promise a specific monthly benefit at retirement based on salary and years of service, cash balance plans present participants with hypothetical account balances that grow annually.

This balance is typically composed of contributions made by the employer, along with interest credits, which are often linked to a fixed interest rate or to some index. Employees can visualize their retirement savings in a manner similar to a defined contribution plan, as they can see their account balance grow over time. This feature provides transparency and clarity regarding the benefits employees have accrued, making it easier for them to understand their retirement benefits.

In contrast to the other options, a cash balance plan does not primarily depend on employee contributions or guarantee a fixed monthly payment in a traditional sense, nor is it focused on stock market investments. Instead, it is structured around individual account statements that illustrate the growth of each participant's benefit within the plan.