My wife's employer converted their defined benefit pension to a "Cash Balance" plan earlier this year. Though we'd like to think we know a thing or two about investing and retirement planning, etc..., we're really baffled as to the in'-and-out's of this new type of pension plan. She now gets a quarterly statement from her employer that shows, in big bold print (of course), a dollar amount that I guess is the "cash balance". What does this "cash balance" really represent? What happens if she were to leave that employer (not through a retirement, though)? Does she get that dollar amount in a lump sum - almost like a 401k rollover?As you can probably tell, the information provided by her employer is not helpful. Any web sights out there that may be helpful?All info. is greatly appreciated.ThanksKen
Ken asks:<<My wife's employer converted their defined benefit pension to a "Cash Balance" plan earlier this year. Though we'd like to think we know a thing or two about investing and retirement planning, etc..., we're really baffled as to the in'-and-out's of this new type of pension plan. She now gets a quarterly statement from her employer that shows, in big bold print (of course), a dollar amount that I guess is the "cash balance". What does this "cash balance" really represent? What happens if she were to leave that employer (not through a retirement, though)? Does she get that dollar amount in a lump sum - almost like a 401k rollover?>>That number reprsents her vested interest in the retirement plan as of the statement date. If she leaves, that's what would be available to her at retirement. Whether she can roll it to an IRA on termination prior to reaching the plan's retirement age depends on the plan. Most would allow her to do so, but not all do. That's a question she should ask of her HR/Benefits folks.Regards..Pixy
Here's a site you might be interested in reguarding Cash Balance Plans. http://www.cashpensions.com/
Here's an even better site on cash balance pensionshttp://clubs.yahoo.com/clubs/ibmpensionIBM made the switch earlier this year and a lot of employees over age 40 feel they've been screwed.intercst
Although defined contribution pension plans have the effect of giving older employees less in pensions, they also remove a financial incentive for age discrimination.With defined benefit pension plans, young employees company paid pension costs are peanuts, but pension costs for those close to employment are large.Defined contribution plan levels the playing field. All employees pension costs are the same % of salary.So its a mixed bag. Under the old system, those older folks who worked did better, but many did not work. Perhaps under the new system, hiring older workers will be easier.
I think you make a good point about leveling the playing field, but it will not balance the fact that older workers have higher medical costs. And in any case, I get the impression that not only are older workers getting shorted by the stampede over to cash balance plans, but younger workers in the long run will be older workers and everyone gets shorted. After all, one of the advantages to the employer is that costs are lower, i.e., the company puts less in. That can only result in one thing: the employee gets less out.Joe Varga
One thing I like about a cash balance plan is they are more portable than the traditional defined benefit plan. I now have money in an IRA from 2 cash balance plans, that I wouldn't have available if the company hadn't made the switch.The ex-employers don't have to keep track of me until I retire, and I have the luxury of investing my own money.
Bobbcat,As I've spent some time trying to understand these types of pensions, I'm coming to wholeheartedly agree with your point of view. I like the "control factor" the portability aspect can afford me - unfortunatly, you're 'forced' to leave your employer to exploit it (which may play into the employer's hands.....).In my wife's particular situation - and anyone else who's been with an employer for a decent amount of time - I just don't know if what she's being shown as her "cash balance" is a "fair" amount. Given the level of debate that appears to exist about the ethical nature of implementing these types of plans, I'm surprised there hasn't been more talk about it on this board.Ken
Lots of Plans have gotten converted to Cash Balance. Depending upon your company, you may have good or not so good investment choices. If you are 'vested', and this is usually indicated on the statements you get (in many cases, you are 100% vested after 5 years of employment), when you leave the company you usually have several options - leave the money with the plan custodian, do a rollover to a self directed IRA or a rollover to a new employer 401K, or take a lump sum distribution and pay big time taxes on it. My preference would be to rollover into self directed IRA at no load mutual fund such as Vanguard, and do a Couch Potato portfolio per www.scottburns.com
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