As an employee with a cash balance plan, you likely have questions about the investment options available in your employer-sponsored retirement plan. Cash balance plans are a type of defined benefit plan that have become increasingly popular over the last few decades. With a cash balance plan, employees have hypothetical individual accounts, and contributions made by the employer are credited with interest. When it comes to investing, cash balance plans offer fewer choices compared to 401(k)s and other defined contribution plans. However, there are still key factors to consider regarding your cash balance plan investment options.
Cash Balance Plans Offer Limited Investment Control for Participants
Unlike 401(k) plans where employees choose how to invest their account, cash balance plans only allow participants limited control. The sponsoring employer manages the plan’s investments and participants do not get to select from a menu of funds. Cash balance accounts only earn the interest rate specified in the plan documents, which is often tied to an index like the 30-year Treasury bond yield. Some plans may offer a fixed rate while others credit interest based on investment performance. But in all cases, the plan trustees control asset allocation. For participants, understanding how interest crediting rates work is important to forecasting your future balance.
Focus on Your Overall Asset Allocation Including Other Accounts
While your hands are tied regarding cash balance plan investments, look at your total savings holistically across all accounts when making asset allocation decisions. Maintain a diversified mix of stocks, bonds, and other assets in your IRA or taxable brokerage account to balance the fixed income tilt of your cash balance plan. Aim for suitable asset allocation target percentages for your age and risk tolerance. Because your cash balance account provides stable value, you can take more risk in your overall portfolio. Focus on minimizing fees, managing taxes efficiently, and diversifying in your self-directed retirement accounts.
Model Different Interest Rate Scenarios to Estimate Your Future Balance
Study how various interest crediting rates impact your projected cash balance at retirement. Ask about the plan’s historical returns or use a conservative estimate like 5%. Then model higher and lower rates to see the potential fluctuation in your balance over a 20-30 year period. Understanding the range of outcomes will help you determine if your cash balance account is on track to deliver sufficient income in retirement or if you need to save more in other accounts like IRAs. If your employer provides personalized statements, review your current balance, contributions, and interest credits annually.
Consider Annuity Income Options Offered By Your Cash Balance Plan
At retirement, cash balance plans generally require that accrued benefits be taken as either a lump-sum payment or in the form of an annuity. Looking at annuity payout options can help in deciding between the choices. Annuity income guarantees a monthly payment for life, reducing concerns over outliving savings. If you have other adequate retirement income sources, a lump-sum for flexibility may be appealing. But annuities offered by cash balance plans often pay higher rates than those commercially available, so weigh the trade-offs. Consult your plan administrator about the potential monthly payment amounts under different annuity products.
Cash balance plans limit participant control over investments, but understanding your options is still important for retirement planning. Focus on overall asset allocation, model interest rate impacts, and consider annuity payouts at retirement. By learning how your cash balance plan works, you can make savvy savings and withdrawal decisions.