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Chapter 4. No Plan Is an Island > Cash Balance Defined Benefit Plans

Cash Balance Defined Benefit Plans

There is a variation of the traditional defined benefit plan called a cash balance defined benefit plan. This hybrid plan contains elements of both a defined benefit plan and a 401(k) plan. Instead of a guaranteed benefit, each year the company sets aside a dollar amount attributed to your retirement account and applies either a fixed or a variable rate of interest to the deposit. The value of this account then becomes your retirement plan after you vest, which is in five years. Once you are vested, the account is portable if you leave the company and is more attractive to younger employees who may not stay with one company for the 10 years that would be required to vest in a traditional defined benefit plan. According to the General Accounting Office (GAO), approximately 20 percent of Fortune 1000 companies now sponsor a version of this plan.

Be Careful

Often, companies require integration with Social Security benefits to limit their cost of providing retirement benefits. In doing so, they may cap your pension benefit so that, in conjunction with your Social Security payment, it doesn't exceed the salary you were making before retirement.



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