401k’s are so Yesterday: There’s a New Retirement Player in Town
Are traditional 401k retirement plans about to be overshadowed by the growing popularity of a simpler and more portable pension plan? Although cash balance plans, or CBs, have been around since the early 1980s, interest in these hybrid pension plans has been growing exponentially over the past ten years.
According to Department of Labor statistics, there were 1,300 CB plans with a total of $426 million in assets in 2000. By 2010 the number of plans had increased to 7,600 plans with a value of just under $800 billion. So why has the number of participants in CB pension plans been steadily increasing?
One reason for the growing popularity is the plan’s portability. Unlike a 401k, a participant can withdraw the entire amount of their CB if they are leaving their employment. This is because CBs have aspects of both a defined benefit and a defined contribution plan. Typically, participants in a 401k plan have to either wait until retirement to withdraw their funds or draw their benefit in the form of an annuity.
However, since a CB is essentially a hypothetical account, participants are able to easily rollover their entire account balance whenever they need to. The employer, or whoever the plan sponsor is, contributes to this hypothetical account based on a set interest crediting rate…