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Author: BruceCM Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75537  
Subject: Re: service based contributions Date: 1/28/2010 12:33 AM
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A cash balance plan (CBP) is a defined benefit plan that is funded a bit differently than a regular DBP that guarantees a future benefit. Instead of funding the plan based on an actuarial present value of your future benefit, the CBP makes an annual contribution that will generally be based on either your salary, your years of service or your age, or some combination. Once made, the CBP will then 'guarantee' an annual rate of return.

The disadvantage of this for older workers is that the annual contribution amount is usually, but not always, less than what the annual contribution would have been made with a traditional DBP...but it typically is a better annual contribution for younger workers....although this depends on the funding formula.

The only way to figure this out is to do a time-value-of-money calculation on what is being contributed to your plan, compared to the amount you require. Some will say that you need to have 10% of your salary contributed to your CBP each year, but this is at best a ball-park guesstimate that could be well off the mark.

BruceM
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