How Do Cash Balance Plans Affect the Pension Landscape?

Kevin E. Cahill Mauricio Soto

IB#14

Introduction

Over the past decade, a notable shift has occurred within defined benefit pensions — away from traditional plans and towards hybrids, such as cash balance plans.  Along the way, the movement to cash balance plans has been met with substantial resistance.  Critics argue that cash balance plans discriminate against older workers and that employers have implemented these plans as a cost-cutting measure. Proponents say that cash balance plans are an effective way to provide a secure retirement income for a highly mobile workforce and that measures can be adopted to protect older workers.  Critics have been bolstered by recent events, including two high-profile court rulings that have raised questions about the legality of the plans.  Proponents are awaiting draft Treasury egulations expected to support cash balance plans.  As background to all the commotion, this brief provides an overview of cash balance plans: how they work, why firms might want to offer them, and what their impact will be on employees and employers…