Business and Personal Finance Dictionary

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• CASH BALANCE PENSION
  
  A cash balance pension is an employer sponsored retirement plan that resembles defined benefit plans in some ways and defined contribution plans, such as 401(k)s, in others. As with defined benefit plans, the employer makes a contribution in each employee's name and guarantees a return, typically promising to pay interest at a rate linked to the rate being paid on US Treasury bonds. Like 401(k)s, the plan is portable, which means any employee who leaves the company can move the assets that have accumulated into a rollover IRA or into a new employer's plan, if the new employer's plan allows transfers. The employee also has the option of leaving the assets in the old employer's plan, where they will continue to earn interest. Cash balance plans have advantages for younger employees since a percentage of their earnings is added to the plan each year and can compound over time. The plans also benefit employees who change jobs during their careers. On the other hand, employees who have stayed at the same job for many years and whose employer switches from a traditional defined benefit plan to a cash balance plan are likely to receive substantially less pension income from a cash balance plan than from a traditional plan. That's because traditional plans typically figure pension income based on the worker's salary in the final three to five years before retirement, when salaries tend to be highest.
  
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