Cash Balance 

Cash Balance Plan is a defined benefit plan that defines the benefit in terms that are more characteristic of a defined contribution plan. In other words, a cash balance plan defines the promised benefit in terms of a stated account balance. In a typical cash balance plan, a participant's account is credited each year with a "pay credit" (such as 5 percent of compensation from his or her employer) and an "interest credit" (either a fixed rate or a variable rate that is linked to an index such as the one-year treasury bill rate). Increases and decreases in the value of the plan's investments do not directly affect the benefit amounts promised to participants. Thus, the investment risks and rewards on plan assets are borne solely by the employer. When a participant becomes entitled to receive benefits under a cash balance plan, the benefits that are received are defined in terms of an account balance.

An employer may decide to adopt a cash-balance plan because these plans offer three advantages.

 the benefits are easily communicated to employees.

 past service credits can be established, which is impossible in a defined-contribution plan.

 since participants share in investment experience, the rate of return on a long-term stock portfolio may be higher than a smaller, guaranteed rate of return.

Disadvantages:

The PBGC does not guarantee the entire benefit. This could result in a smaller-than-expected benefit if the employer liquidates and leaves the plan with insufficient assets.