Cash Balance Retirement Plan Would Offer Texas Workers Guaranteed Retirement Benefits
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Backgrounder

Cash Balance Retirement Plan Would Offer Texas Workers Guaranteed Retirement Benefits

Both traditional defined benefit and cash balance retirement plan designs are examples of guaranteed return retirement plans that provide retirees a protected stream of lifetime income.

Both traditional defined benefit and cash balance plan designs are examples of guaranteed return plans that provide retirees a protected stream of lifetime income. According to the U.S. Department of Labor, a cash balance retirement plan, “is a defined benefit plan that defines the benefits in terms that are more characteristic of a defined contribution plan.”

What are the Benefits of Cash Balance Plans for Employees?

  • Provides members with a personal retirement account within which they contribute a portion of their salary along with their employer, who adds an additional predetermined contribution.
  • Defines a member’s benefit as an account balance with a minimum growth rate, while a traditional pension plan defines a member’s benefit using an accrual formula based on salary, a multiplier, and years of service.
  • Cash balance plans credit a member’s account annually with a “pay credit” (% of pay) and an employer-paid “interest credit rate” (either a fixed rate or a variable, formula-based rate).
  • Cash balance plans offer employees the ability to receive their benefits in the form of annuities—offering lifetime income protection—but they also have the flexibility to simply take a lump sum distribution of their account balance if preferred.

How Do Cash Balance Plans Invest Contributions? 

  • Assets of cash balance plans are pooled and professionally managed in a government-sponsored retirement system.
  • When a member elects to retire, their annuity benefit will be based on their final account balance.
  • The interest credit functions like a traditional pension in that the credit is guaranteed, usually at or just above a low-risk interest rate, and any plan investment experience below the assumed rate is borne by the employer.
  • Investment returns above the assumed rate are typically shared between the plan and employee to allow the employee to realize some upside benefit while also creating a cushion within the plan against potential future negative market performance.

How is Risk Managed in a Cash Balance Plan?

  • Similar to a traditional pension, cash balance plan assets are managed by the employer, but the investment risks borne are typically much lower for employers than many legacy pensions.
  • Setting a guaranteed benefit at a realistic cash balance rate reduces downside risks for employers by removing the plan’s reliance on market and demographic assumptions.

Proposed ERS Cash Balance Plan Offers Workers Guaranteed Benefits

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