Cash balance plans are defined benefit plans. In contrast, 401(k)
plans are a type of defined contribution plan. There are four major differences
between typical cash balance plans and 401(k) plans:
- Participation - Participation in typical cash balance plans generally does
not depend on the workers contributing part of their compensation to the plan;
however, participation in a 401(k) plan does depend, in whole or in part, on an
employee choosing to make a contribution to the plan.
- Investment Risks - The investments of cash balance plans are managed by the
employer or an investment manager appointed by the employer. The employer bears
the risks of the investments. Increases and decreases in the value of the
plan's investments do not directly affect the benefit amounts promised to
participants. By contrast, 401(k) plans often permit participants to direct
their own investments within certain categories. Under 401(k) plans,
participants bear the risks and rewards of investment choices.
- Life Annuities - Unlike 401(k) plans, cash balance plans are required to
offer employees the ability to receive their benefits in the form of lifetime
- Federal Guarantee - Since they are defined benefit plans, the benefits
promised by cash balance plans are usually insured by a federal agency, the
Pension Benefit Guaranty Corporation (PBGC). If a defined benefit plan is
terminated with insufficient funds to pay all promised benefits, the PBGC has
authority to assume trusteeship of the plan and to begin to pay pension
benefits up to the limits set by law. Defined contribution plans, including
401(k) plans, are not insured by the PBGC.