What is the distinctive feature of a cash balance plan?

• A. It provides benefits based on company profits
• B. It maintains benefits in individual record-keeping accounts
• C. It is entirely defined contribution
• D. It offers guaranteed returns regardless of employee performance

Answer: (B)

The distinctive feature of a cash balance plan lies in its structure that combines elements of both defined benefit and defined contribution plans. Specifically, it maintains benefits in individual record-keeping accounts for each participant. This means that while the plan promises a specific benefit at retirement, it does so by crediting each participant’s account with contributions and interest credits, akin to a defined contribution plan.

In this structure, employees can see their account balance grow over time, and the retirement benefit is expressed as a lump sum, which is different from traditional defined benefit plans where the benefit is often based on a formula related to years of service and salary upon retirement. This unique feature aligns with the trend toward transparency and portability in retirement savings, making it easier for employees to understand their benefits.

While guaranteed returns and a focus on company profits might seem like attractive features, they do not accurately capture the core aspect of what distinguishes cash balance plans. The emphasis on maintaining individual accounts underpins the plan's operation and provides clarity for employees regarding their retirement savings.