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When it comes to planning for retirement, one size certainly doesn’t fit all. Employees and businesses need retirement solutions that adapt to their unique circumstances, goals and financial situations — and more organizations are discovering that a cash balance pension plan can be a critical element to help meet their diverse needs.
When it comes to planning for retirement, one size certainly doesn’t fit all. Employees and businesses need retirement solutions that adapt to their unique circumstances, goals and financial situations — and more organizations are discovering that a cash balance pension plan can be a critical element to help meet their diverse needs.
Cash balance plans offer a hybrid approach that combines the stability of defined benefit plans with the transparency of defined contribution plans — providing more flexibility, higher contribution limits and a predictable annual expense for employers. It’s no wonder cash balance plans continue to grow in popularity, especially among professional services firms and small/mid-size businesses.
Like any retirement plan, cash balance pension plans have distinct advantages, challenges and opportunities that should be carefully considered. So, how do you know if a cash balance plan is right for your organization? Read on to learn more about how cash balance retirement plans work, their unique benefits and how you can facilitate plans that work best for your partner owners, employee members, and your business.
Cash balance pension plans offer the best of defined benefit and defined contribution plans. They provide the guaranteed retirement benefits that traditional pension plans are known for along with the transparency and flexibility more commonly associated with 401(k) plans.
Cash balance plans offer significant tax benefits and predictable costs for employers/owners, as well as the opportunity for participants to accelerate retirement savings.
October Three specializes in delivering innovative cash balance and hybrid pension plans designed to provide a flexible path to retirement readiness.
A cash balance pension plan is a hybrid between a defined benefit (DB) and defined contribution (DC) retirement program.
In a cash balance plan, each participant has an individual retirement account that receives periodic employer contributions, often based on a predetermined percentage of their salary, and subsequent investment earnings.
At their core, cash balance plans are structured like a defined benefit plan, providing retirement benefits based on salary and service that can easily be distributed as either a lump sum or in a more traditional annuity format. However, the plans are expressed as an account balance and typically earn interest based on the actual trust return, similar to a 401(K). Because plans operate and are communicated like funds in a bank account, rather than an annuity commencing at some future retirement age, participants know the exact value of their benefits at all times.
In a typical cash balance plan, the account is comprised of two types of credits:
Pay credit:
Pay credit: This is a set percentage of a participant’s compensation or a fixed dollar amount paid into the account by the plan sponsor.
Interest credit: There are 2 different ways to credit interest today, a fixed structure and a variable structure. Fixed interest credits are tied to an index rate such as a treasury rate. However, variable rate interest credits are based on the investment return of the underlying plan assets. As a result, they are more common as they align the account balance growth with the asset growth directly, minimizing risk and volatility to the plan sponsor.
The account grows each year through employer contributions and interest credits. But unlike a 401(k), where investment risk lies with the participant, the employer shoulders the investment risk in cash balance plans, ensuring the promised account balance regardless of market fluctuations.
As a result, cash balance plans provide a guaranteed retirement benefit — either as a lump sum or converted into a lifetime annuity — that’s based on the number of years someone works, their earnings and the plan’s pay and interest credits. As contributions and credits compound, the plan will steadily grow every year providing a substantial benefit upon retirement.
Important Update: On January 14th, 2026, the Board of the FASB took a big step towards clarifying the accounting treatment for Market-Based Cash Balance plans. Once finalized, these steps will mean that well-managed daily-valued Market-Based Cash Balance plans will be immune from the accounting risk and volatility typical of defined benefit pension plans.
To learn more about this update, see October Three’s commentary on the FASB’s approved recommendations, including the issue, proposed solution, and current status.
Cash balance plans offer a more flexible path to retirement readiness. As a plan sponsor, you benefit from significant tax advantages, predictable costs, and reduced risk, while participants gain the opportunity to accelerate their retirement savings.
Here’s a closer look at the primary advantages of cash benefit plans:
Cash balance plans are qualified retirement plans, which means that contributions are tax-deferred. Participants don’t pay taxes on their retirement savings until they make withdrawals, and employers’ contributions are tax-deductible when made, reducing your organization’s taxable income. In addition, many high-income professionals will take reduced compensation in lieu of receiving a cash balance credit, thus reducing their taxable income.
401(k) plans and IRAs both limit the amount participants can contribute each year. But because cash balance plans are DB plans, they’re not subject to the same contribution limits and rules. Cash balance plans allow higher contribution limits for each participant that increase as participants age and earn more — enabling participants to increase their retirement savings while often reducing their annual tax burden, increase savings and choose the savings amount that works best for their needs.
The account structure of cash balance plans provides similar transparency to a 401(k) plan. Unlike traditional defined benefit plans that communicate benefits as an annuity amount payable at a specific retirement age, cash balance plans enable participants to see their balance and watch as their account grows each year.
Cash balance plans also allow for more flexible payout options. Participants can choose a lump-sum payout that can be rolled over into IRAs or other retirement plans for continued tax-deferred growth, or they can convert some or all of their balance into a lifetime annuity to provide a guaranteed and steady income stream throughout retirement.
Cash balance plans also benefit from enhanced protection under the Employee Retirement Income Security Act (ERISA), which safeguards participants' accrued benefits from bankruptcy, lawsuits and creditors. Additionally, these plans are often insured by the Pension Benefit Guaranty Corporation (PBGC), which further enhances their reliability if a plan sponsor fails to meet its financial obligations.
Despite their advantages, cash balance pension plans also come with a unique set of challenges that you should consider thoroughly before deciding whether a cash balance approach is right for your organization. In particular, you should weigh whether the cash balance model aligns with your organization’s long-term retirement and tax planning strategy.
While participants can accumulate significant benefits inside a cash balance plan, they do not have investment discretion over how the assets backing those benefits are invested. Instead, the plan sponsor makes the investment decisions and the returns generated are shared among all plan participants. However, many participants can and do adjust how their other retirement assets are invested to balance out the investment mix utilized in the cash balance plan.
A notable limitation of cash balance plans is the inability for participants to change the amount of money that is routed into the cash balance plan each year, often on their behalf. While employees/participants can’t change their benefit accruals each year, many plan sponsors will amend the plan every three to four years to allow participants an opportunity to modify their benefit accrual level to better reflect their current economic situation. Likewise, other plan sponsors choose to maintain the plans without making changes, but they remind employees that they can modify their annual 401(k) contributions at any time if they need additional cash flow flexibility.
Cash balance plans are designed to be permanent, with no option for elective contributions. Unlike 401(k) plans, which may offer loans or hardship withdrawals, cash balance plans do not offer such flexibility. Withdrawal timing is limited to a distributable event such as retirement, termination, death, disability, or the participant reaching age 59.5, when the plan may allow them to access their account balances and take an in-service distribution.
The complexity of cash balance plans can lead to higher administrative costs. For instance, an actuary must review and certify plans each year to ensure compliance and proper funding. These additional expenses should be considered by employers as part of the overall benefits package offered to employees.
Cash balance plans come with their own set of rules and restrictions, which is why an actuary is needed to oversee the plan so that it remains in compliance with all of the IRS laws and regulations.
There are several unique aspects of cash balance plans that set them apart from the traditional pension and 401(k) plans most companies and participants are familiar with. Let’s take a look:
Cash balance plans primarily differ from traditional pension plans in the way retirement benefits are calculated and presented. In traditional pensions, benefits are tied to an employee's final salary and years of service at your organization. Retired employees receive monthly payouts based on their salary level at the time of retirement.
Conversely, cash balance plans specify a retirement benefit as a hypothetical account balance that grows with your organization’s contributions and interest credits. A participant’s exact benefit payout during retirement is not tied to their salary at the time of their retirement. As a result, cash balance plans provide a more transparent view of the retirement value being accumulated.
Despite similarities in appearance, there are several key differences between a cash balance plan and a 401(k). To start, 401(k) plans limit how much participants can save annually to $23,000, or $30,500 for those aged 50 or older, while cash benefits plans enable participants to accrue significantly more as they age. In cash balance plans, the employer assumes the investment risk and selects how the assets are invested. Although participants can’t select how the assets are invested like they can in a 401(k) plan, they ultimately receive the sum of the credits (the amount contributed by the employer on their behalf) and the investment returns (in the form of interest credits). This is similar to the way a 401(k) plan operates. Cash balance plans also offer the option of receiving benefits as a lifetime annuity, a feature not typically inherent in 401(k) plans.
In addition, 401(k) plans rely primarily on employee contributions with optional employer matching, while cash balance plans are entirely funded by the employer/owners. Finally, 401(k) plans and other defined contribution plans are not insured by the PBGC, unlike cash balance plans.
As employer-sponsored DB plans, cash balance plans offer structured benefits while individual retirement accounts (IRAs) are personally managed savings accounts with contributions capped at much lower limits. Likewise, IRAs allow individuals to control their investment choices directly, with the account balance impacted based on market performance. Accruals in cash balance plans are significantly higher, potentially allowing for accelerated retirement savings beyond the annual limits imposed on IRAs. Additionally, cash balance plans can offer tax advantages for both employers and employees that are distinct from the tax treatment of IRAs, including larger tax-deductible contributions for employers.
With the right strategy and administration, cash balance pension plans can maximize the advantages of defined benefit and defined contribution plans — providing a guaranteed payout with an account-based structure that offers a clear view of your benefits.
October Three specializes in crafting innovative cash balance and hybrid pension plans that are tailored to meet the diverse needs and financial goals of your organization and employees. Our unique approach provides you with:
Predictable plan costs that enable effective financial planning and budgeting.
Reduced risk by basing interest credits on the underlying return of the plan’s assets — for participants, this provides a similar experience to 401(k) plans by aligning the growth in the liabilities (account balances) with the growth in the underlying assets.
Long-term retirement solutions that offer employees a reliable source of income and boost employee commitment and loyalty.
Learn more about partnering with October Three to craft customized cash balance plans that align with your financial goals and retirement planning needs.
Both serve distinct purposes. The best solution for many companies is to use both together to provide a flexible retirement accumulation strategy that can more effectively meet diverse organizational needs.