You might have several questions related to cash balance pension plans if your employer is changing its traditional plan to this one. People plan their retirement in such a manner that they don’t have to suffer because of the financial crunches. They should be able to look after the medical expenses after they retire. That’s why the government has designed several plans such as the Boca Raton cash balance pension plans. Your employer will contribute to these plans so that you can withdraw money as and when required after a certain age.
Understanding cash balance plans
Generally, there are two types of pension plans. One is defined contribution plans, and another is defined benefits plans. In a defined contribution plan, the employer contributes a definite amount to the employee’s retirement plan. On the other hand, the eligible employee receives definite benefits at retirement in a defined benefit plan. In a definite contribution plan, the total amount of benefits received by the employee depends on the contributions made along with the losses and gains of the account.
A cash balance pension plan is a definite benefit plan in which the benefits to the employees are pre-defined or promised to the employee.
How cash balance plan is different from the 401K plan?
It should be noted that cash balance is a defined benefit plan, whereas a 401K plan is a defined contribution plan. Some of the ways in which they are different from one another are explained below:
- Participation- In a cash balance plan, the employee’s contribution does not make much difference, whereas, in 401K plans, the participation of the employee’s contributions makes a great difference, whether wholly or partially.
- Risks associated with investments- In cash balance plans, the investments are managed by either the investment manager or the employer. In this scenario, the risks are borne by the employer, and the employee does not have to worry about it. Any increase or decrease in the investment amounts does not affect the benefits that an employee will get directly. On the contrary, in 401K plans, the employees have to bear the losses and rewards depending on the type of plan.
- Life annuities- The employee is able to receive the benefits in the form of lifetime annuities, which is not the case with 401K plans.
In case you have any query related to your plan or you notice any change, you should contact your employer, who can give you the contact details of the right person.
