Question

Cash Balance Pension Plans

a.) Do not allow lump sum distributions.
b.) Are more beneficial to older participants.
c.) Have hypothetical accounts.
d.) Have separate accounts.

Answer 1

Cash Balance Pension Plans are a type of defined benefit plan and do not have individual accounts, differing from defined contribution plans like 401(k)s, which allow for individual investment portfolios and portability between jobs. These defined contribution plans are designed to be tax-efficient and aim to outpace inflation to protect retirees' purchasing power.

Step-by-step explanation:

Cash Balance Pension Plans do not typically have separate accounts for each individual employee; instead, they operate on a pooled basis. Unlike in 401(k)s and 403(b)s which are defined contribution plans, Cash Balance Plans are considered a type of defined benefit plan. However, many modern retirement savings options have transitioned to the more individual-focused defined contribution model. With these plans, employers contribute a fixed amount to an employee's retirement account, which is then invested in a variety of vehicles. Contributions are tax-deferred, and these accounts are portable, meaning they can move with the employee between jobs. As investments grow, the retirement savings potentially outpace inflation, a notable advantage over traditional pension plans.

Legislation safeguards the funding of pension schemes and enhances transparency, penalizing firms for underfunding their pension plans and providing employees with more information about their pension accounts.