Defined Benefit Plans
Traditional Defined Benefit Plan
Defined Benefit Plans provide a fixed, pre-established benefit for employees usually based on a combination of projected pay and projected service at retirement. These plans are designed for expecting employees to spend their entire career at the same company. Benefits are usually paid as an annuity during retirement. Some employers find defined benefit plans offer business advantages. For instance, employees often value the fixed benefit provided by this type of Plan. In addition, employers seeking higher annual contributions (and tax deductions) find these plans to be the best option.
A cash-balance plan is a defined benefit plan with underlying features of a traditional pension, but with easier to understand benefits more closely resembling a profit sharing plan. Like a traditional pension plan the employee doesn't invest any of their own money in the plan, nor do they have any responsibility for the investment choices. The cash-balance plan credits each participant’s account with a set percentage of salary each year, plus an interest rate that is applied to the balance. At retirement, these benefits may be paid as a lump sum rather than annuity payments of traditional pension plans. Additionally, these benefits are usually skewed to provide differing levels of benefits to various business classifications within the company. Cash Balance plans may be an integral component and perfect solution for them.