How does a cash-balance plan work?
In a typical cash-balance plan, your employer contributes a set amount of money — for example, 5% of your salary — to an account each year. Your employer also guarantees that your account will grow at a certain rate every year. That rate may be either a fixed amount or a variable rate tied to a benchmark, such as the one-year Treasury bill. When you leave your job or retire, you can take your balance in a lump sum and roll it into an individual retirement account. Alternatively, you can choose an annuity that will provide a guaranteed monthly payment for the rest of your life. Q: How do cash-balance plans differ from traditional pension plans? A: A traditional defined-benefit plan is based on three factors: your age, your salary and the number of years with the company. The amount of your benefit grows slowly during your early years, then rises sharply as you grow older, earn more money and rack up more years with your employer. In addition, most traditional pension plans don’t let you
