what is the difference betwen defined benefit plan and cash balance plan? Thanks!
A cash balance plan is a type of defined benefit plan. A “traditional” defined benefit plan defines the benefit usually by service and pay (e.g. 1% x Service x Average Pay) payable at age 65. A cash balance plan instead looks like a 401(k) plan by giving a % of pay each year that grows with some interest rate (e.g. 5% of pay credited with 30-year Treasury rate); this account grows and is either paid out upon termination/retirement or converted to an equivalent life annuity.
Thank you Does it mean that you get payout from traditional defined benefit pan only if you stay in the firn until retirement? And if you leave the firm let’s say after 10 years you don’t get anything?
Not necessarily, most of traditional defined benefit plans and cash plans have vesting periods (example: 5 years). Once you are fully vested, you can leave the firm and still get full balance in your plan. You can take it as a cash distribution and pay taxes on it or roll it over into an IRA.
a cash balance plan has better portability than a traditional db. the easy ability to roll a cash balance plan to an ira is an important characteristic.