Cash Balance Pensions

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Pension plans provided by companies are undergoing major change. Many companies are totally eliminating pension plans in favor of the individual employee being responsible for their own retirement planning. Most pension plans today are a defined-benefit - guaranteed to draw a fixed amount each month.

The U.S. Treasury Department has proposed drastic changes in traditional pension plans. Basically, they want to eliminate the defined-benefit plan in favor of cash-balance pension plans. The main reason for doing this is to save money for the companies involved.

The biggest difference in the two plans is the accrual rates at which benefits build up during employment. With the traditional plans we have now, such as the defined-benefit plan, workers earn most of their benefit toward the end of their career. With the cash-balance plans, however, a more level share of benefit is set aside throughout the entire career.

The cash-balance plan offers a lump sum amount to the employee upon retirement. There are many problems with this type of plan. Most individuals take the lump sum but do not have the skills needed to properly manage it. Therefore, they risk losing the entire sum rather quickly, thereby, leaving them no pension fund for future needs. They have the option of converting the lump sum into a monthly annuity but studies show that few individuals exercise this option.

The cash-balance plans seem to lose sight of the real purpose of pension plans – to provide monthly income to an individual for life. Some companies are currently switching from a defined-benefit plan to a cash-balance type plan. Older workers are often shortchanged when this happens. Early retirement is often given as a choice but usually means the employee draws less money. Basically, the companies are saving money while the employee is losing money.

Knowledge is the only way to deal with this situation. Employees need to ask more questions about their pension plans and become more involved in their retirement planning. Lump sum distributions should be carefully explored and only utilized as a last choice. As pension plans change, employees need to change with them. The web can be an enormous help in planning your retirement. Consult a financial planner. Financial planning is difficult. It’s OK to ask for help.

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Filed Under General Retirement, Pension Plans 

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