Questions to Ask About a Cash Balance Plan
A cash balance plan is a pension that reports itself as an account balance, which is why it raises questions a 401(k) does not. The first five groups are for an employee talking to HR or the plan administrator: how the credits work, vesting and value, a conversion from an older pension, leaving and payout, and safety and the 401(k) beside it. The sixth is for a business owner or partner going through a proposed plan with an actuary.
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The questions
Each question, and why to ask it
How it works
How is my pay credit worked out: a percentage of pay, a flat dollar amount, or a rate that rises with age or service?
Why ask it
The pay credit is what the employer adds for each year you work, and the formula is written in the plan document, so ask for the page. A rate that steps up with age or service rewards staying, while a flat one is easy to check against a pay stub. Finish by asking for your own credit this year in dollars.
What interest crediting rate does the plan use: a fixed rate, a published rate such as a Treasury yield, or the return on the plan's investments?
Why ask it
This rate decides how the account grows in the years when nothing else is added, including after you leave. A fixed rate is predictable, a rate tied to a bond yield moves with the market, and one tied to investment returns can be high one year and thin the next. Ask what was credited in each of the last five years.
Is the balance on my statement money set aside in my name, or a record of what the plan has promised me?
Why ask it
In most cash balance plans it is the second: the assets sit in one pool the employer invests, and your 'account' is a running total of credits. That is why you pick no funds, and why it matters who makes up a shortfall. Ask it plainly, because the statement looks so much like a 401(k) that people assume it is one.
When do I become eligible, and is joining automatic or do I need to sign up?
Why ask it
Some plans start credits on the first day, others after a waiting period, and some leave out certain job classes altogether. Get your entry date, and find out whether the months before it still count toward vesting. Where joining is automatic, the only paperwork on day one may be naming a beneficiary.
Do I pay anything into it, or does the whole credit come from the employer?
Why ask it
Most of these plans are funded by the employer alone, so nothing leaves your paycheck and the plan never appears on a pay stub. That is also why people forget they have one. If employees here do contribute, the follow-ups are whether that is optional and how the contributions are taxed.
Which pay counts toward the credit: base salary only, or bonus, overtime and commission too?
Why ask it
The definition of pay can move the credit more than the percentage does, particularly for anyone on commission or with a large bonus. Test the answer on last year: multiply the pay that counts by your rate and see whether it matches the pay credit on your statement.
Is there a floor or a ceiling on the interest credit, and can a year's credit ever be below zero?
Why ask it
This matters most where credits follow investment returns. The plan's worst year so far is the example to request, along with whether you are promised at least the sum of your pay credits when you are paid out. If the rate is fixed, the question takes ten seconds and you can move on.
When are credits added: every pay period, each quarter or once at year end, and do I have to be employed on a set date to get that year's?
Why ask it
A last-day rule is the one to find. If the year's pay credit goes only to people on the payroll on December 31, a November resignation costs a full year of it. Some plans also want a minimum number of hours worked in the year, which matters to anyone part time.
Can the company change the pay credit or the interest rate for future years, and how much notice would I get?
Why ask it
Ask which parts are locked in once earned and which can be changed going forward. Employers can often reduce or freeze future credits after giving notice, and the notice period tells you how much warning you would have to rethink your own saving.
Vesting and value
How many years of service do I need before the account is mine to keep, and how is a year counted?
Why ask it
Ask for your vesting date, not just the rule. Vesting in these plans is often all or nothing on a single day, so leaving a month early can mean leaving with none of it. Check whether part-time years, leave and service before the plan started count.
If I left today, how much would I be paid, and is that the same figure as the balance shown?
Why ask it
Often the vested balance is the lump sum, but do not assume it. Some plans, converted ones especially, hold an older pension benefit alongside the account, and the amount payable can differ from the number on the statement. Get the figure in writing with a date on it before any decision about leaving.
What monthly income would this balance buy at the plan's normal retirement age, and what assumptions sit behind that estimate?
Why ask it
A balance means little until it is turned into income. The estimate rests on the interest credits assumed between now and then and on the plan's conversion factors at retirement, so a figure with neither stated is a guess. Where the crediting rate floats, have them show the estimate at a lower rate as well.
How often will I get a statement, and where can I look up the balance in between?
Why ask it
Some plans post balances online the way a 401(k) does; others send one paper statement a year, months after the year has closed. Check each one for two things: that the pay credit fits what you were paid, and that the interest credit fits the rate you were told.
What happens to my credits and vesting service if I take unpaid leave, go part time, or leave and come back?
Why ask it
Break-in-service rules are easy to overlook until they apply to you. Raise it before the leave starts, and get the number of hours that makes a year of service. Anyone rehired should find out whether earlier years and any forfeited balance are restored.
Is there a cap on the pay or the benefit the plan can count for someone at my salary?
Why ask it
One for higher earners. In the US, tax rules cap both the pay a qualified plan can recognize and the benefit it can pay, and the figures move from year to year. If you are over a limit, the follow-up is whether a separate non-qualified plan picks up the difference, and how that promise is secured if the company gets into trouble.
Conversions
How was my opening balance calculated, and can I see the figures that went into it?
Why ask it
An opening balance usually turns the pension you had earned into a single sum, using an interest rate and a life expectancy table. A higher rate produces a smaller opening balance, so the rate is the number to get. Request the old benefit amount, the rate and the age assumed, all on one page.
Is the pension I earned under the old formula kept as a separate benefit and added to the new credits, or only paid if it is the larger of the two?
Why ask it
'Old benefit plus new account' and 'greater of the two' sound alike and pay very differently. Under the second, new credits may add nothing to what you would receive for a while. Have them show which design this is on your own numbers.
Will there be any stretch of years in which my total benefit does not grow, even though credits are being added?
Why ask it
This is sometimes called wear-away, and long-serving employees in mid-career are the ones most exposed to it. Rules in some places restrict it, so a useful answer says how this plan avoids it. If the answer is yes, find out how many years it would last for someone with your service.
Are there transition credits, or a choice to stay on the old formula, for people of my age and service?
Why ask it
Employers sometimes soften a conversion for staff near retirement with extra credits or a grandfathered formula. Eligibility tends to turn on age and service at a cutoff date, so get the exact test. Where there is a choice, the deadline and whether the election can be reversed matter as much as the terms.
What happens to the early retirement terms I was counting on under the old plan?
Why ask it
A traditional pension may pay a generous benefit to someone who retires at 55 or 60 with long service, and a cash balance account generally has no equivalent. Two things to pin down: whether the subsidy on what you have already earned is preserved, and whether you can still grow into it by reaching the age or service it requires.
Can I have a side-by-side projection of my benefit at 60 and at 65 under the old formula and the new one?
Why ask it
If you get one document out of a conversion, make it this. Ask for both forms, monthly income and lump sum, with the assumptions listed. A younger employee can come out ahead under the new plan and an older one behind, which is why a company-wide average tells you nothing about you.
Is the 401(k) match or any other benefit changing at the same moment?
Why ask it
Conversions are often announced as part of a package, with a higher match offered to offset a slower pension. Judge the package and not the piece: add the yearly pay credit to the new match and set the total against what the old pension and old match were building for you.
Leaving and payout
When I leave, what are my choices: a lump sum, a rollover, a monthly pension, or leaving the balance where it is?
Why ask it
Get the full menu before you resign, along with any deadline for electing. Not every plan allows every option at every age. If a lump sum is available only at certain balances or ages, that can change the timing of a job move.
If I leave the balance in the plan, does it keep earning interest credits, and at the same rate as for current staff?
Why ask it
Where interest credits carry on until you are paid, leaving the money alone is a real option and not just a default. Compare the crediting rate with what you could reasonably earn in an IRA at a level of risk you are comfortable with. Check that you could still take the lump sum later if you change your mind.
Can the lump sum go straight into an IRA or my next employer's plan, and what paperwork starts that?
Why ask it
The word to use is 'direct': a transfer made from the plan to the IRA or the new plan, with no check made out to you personally. Before you fill in anything, confirm that the receiving plan accepts money from a pension. Then get an expected transfer date and a way to see that it has arrived.
If I took the lump sum as cash and did not roll it over, what would be withheld and what else might I owe?
Why ask it
Get the withholding from the administrator in dollars, then take that figure to whoever does your taxes, because withholding and the final bill are different things. Your age at payout can matter as well. Settle this before the check is cut: where a cash payout can be undone at all, the deadline is short.
Would a small balance be paid out or rolled over automatically when I leave, and at what amount does that happen?
Why ask it
Plans are often allowed to clear out small balances without waiting for instructions. If yours is under the threshold, decide where it should go and file the election before the default does it for you. Make sure the plan holds an address that will still reach you in a year.
How long does a payout take once I ask, and are distributions only processed on certain dates?
Why ask it
Some plans pay within weeks; others wait for a quarter end or for the year's final credit to be calculated. If you are counting on the money for a house purchase or to bridge a gap between jobs, get the earliest realistic date in writing.
How does the plan's monthly pension on my balance compare with an annuity I could buy outside with the lump sum?
Why ask it
The plan's conversion factors decide whether its pension is a good deal for your balance. The administrator can give you the plan's figure, and an insurer's quote on the same amount, or an advisor who has no stake in the choice, gives you the other side. The plan's own rate is sometimes better than anything you can buy outside, and sometimes not.
Which forms of pension are offered, such as single life, joint and survivor, or a fixed number of years, and what does each pay on my balance?
Why ask it
Ask for all of them in one table, in dollars a month. The gap between the single-life figure and the joint one is the price of protecting a spouse. The form is normally final once payments begin, so give it a week of thought and not an afternoon.
Does my spouse have to consent if I choose a lump sum or a pension that stops when I die?
Why ask it
In many plans a married participant cannot give up the survivor pension without the spouse's signed and witnessed consent. Find out which form is needed and who may witness it well before your last day. A missing signature can hold up a payout for weeks.
What happens to the account if I die before I have taken it, and who is my beneficiary on file?
Why ask it
Plans differ on whether the full vested balance is paid or only a survivor pension, and on whether a spouse is treated differently from anyone else. Have them read back the name on the form while you are there. A designation made at hiring may predate a marriage, a divorce or a child.
Can I get at any of the money while I still work here, through a loan or a withdrawal at a certain age?
Why ask it
Expect a no on loans, since pensions rarely offer them, and ask anyway. Some plans do let employees past a stated age start benefits while still working. If you had been treating this account as an emergency fund, the answer tells you to keep one elsewhere.
Safety and the 401(k)
Is this plan covered by pension insurance, and up to what level of benefit?
Why ask it
In the United States a federal agency insures many private-sector pension plans up to a limit, and some plans fall outside it, including certain small professional-practice plans and church or government plans. Ask which side of that line this plan is on, and get the answer in writing. Outside the US, ask what protection scheme applies, if any.
How well funded is the plan today, and where can I read its latest funding notice?
Why ask it
Funded status is the plan's assets set against what it owes everyone in it. One year's figure matters less than the direction over several years and what the employer is doing about a shortfall. In some plans a low funding level can also restrict lump sums, which is worth knowing before you count on one.
What happens to my account if the company ends the plan, is sold, or goes bankrupt?
Why ask it
Those are three different events with three different answers, so take them one at a time. A plan closed down in good order typically pays everyone out or buys annuities, a sale may move the plan to the buyer, and an insolvency is where insurance and funding matter. Ask whether everyone becomes fully vested if the plan is terminated.
Who decides how the plan's money is invested, and does investment performance change what I am owed?
Why ask it
With a fixed or bond-linked credit, good and bad investment years are generally the employer's concern and not yours. Where credits follow actual returns, some of that risk is yours. The answer tells you which kind of plan you are in more reliably than the enrollment leaflet does.
How much does the company put toward my retirement each year across this plan and the 401(k) together, and does one reduce the other?
Why ask it
The two usually run side by side, and what you defer into the 401(k) is normally counted apart from pension credits, but employers set the match with the whole package in mind. The combined employer figure, in dollars, is the one to hold up against another job offer. An offer that quotes a match alone may be leaving a plan like this out of the comparison.
Should having this plan change how I invest my 401(k)?
Why ask it
Take this one to a planner, not to HR, who generally cannot give investment advice. An account with a fixed or bond-like credit behaves more like a bond holding than a stock fund, and some people count it that way when setting the mix in the accounts they do control. Bring the crediting rate and your balance to the conversation.
Which documents can I have, and who answers the questions HR cannot?
Why ask it
Ask for the summary plan description, your latest benefit statement and the most recent funding notice. The plan administrator, and behind them the plan's actuary, are the people who can explain a calculation. Put anything about amounts in an email so the reply is on record.
For owners
At my age and income, roughly how much could go in for me each year, and how does that compare with a 401(k) and profit sharing alone?
Why ask it
This is the reason most owners look at these plans, and the answer leans heavily on age: the closer to retirement, the larger the contribution the rules tend to allow. A range is more honest than a single figure at this stage. Bring a staff census with dates of birth, hire dates and pay so the illustration is built on your real numbers.
Is a contribution required every year, and what happens in a year when the business cannot make it?
Why ask it
A cash balance plan is a pension, and funding it is an obligation, unlike a profit sharing contribution the business can decide on from year to year. Ask what the minimum would be in a bad year, what follows a missed contribution, and whether the plan can be amended or frozen in time to reduce it. If your income swings widely, say so before the design is drawn up.
What would I have to contribute for my employees, in dollars, for the staff I have now?
Why ask it
Plans that favor owners have to pass coverage and nondiscrimination tests, which normally means meaningful contributions for staff, often made through the profit sharing side. Get the figure person by person. Your share set against everyone else's is the ratio that shows whether the plan is worth running.
What will it cost to set up and to run each year, counting the actuary, administration, filings, any insurance premiums and investment management?
Why ask it
These plans normally need an actuary's sign-off on funding every year, so running costs are higher than for a 401(k) alone. A written fee schedule should say what triggers extra charges, such as amendments, adding a partner or terminating the plan. Then set the yearly cost against the tax you expect to defer.
Who will be the actuary, who the administrator, and who takes fiduciary responsibility for investing the plan's money?
Why ask it
These can be one firm or three. As the sponsor you are likely to remain responsible for choosing and monitoring them, so ask what each one signs for. An advisor who offers to manage the assets should say in writing whether they act as a fiduciary to the plan.
What interest crediting rate would you write into the plan, and what happens when the investments earn more or less than that?
Why ask it
If the investments fall short of the credited rate, the business makes up the difference; if they run well ahead, the plan can become overfunded and squeeze the contributions you are allowed to deduct. Both are easier to manage when you know about them in advance. Ask how the proposed design keeps that gap small.
How should the plan's money be invested, given that I have to cover any shortfall?
Why ask it
Expect to hear something more cautious than your own retirement account, with a target near the crediting rate, and a reason if the proposal is anything else. Be wary of a pitch that sells the plan on stock market growth, since the business owes the credited rate whatever the market does. Find out who checks the investments against the actuary's assumptions, and how often.
How do the cost and the testing change if I hire, lose staff, or a partner joins or leaves?
Why ask it
A plan designed around today's census can stop working when the census changes. Have the actuary rerun the numbers for the hiring you actually expect over the next few years. In a partnership, the extra questions are whether each partner can have a different credit and who pays for whose.
How many years should I expect to keep the plan, and what does closing it involve?
Why ask it
A pension is meant to be a lasting arrangement, and one closed after a year or two can draw questions from the tax authority, so ask what the actuary considers a safe minimum and why. Closing generally means bringing the plan to full funding, paying everyone out and making final filings. Whether your own balance could then be rolled to an IRA is the last thing to confirm.
How does the deduction work for my type of business, and by what date does each year's contribution have to be made?
Why ask it
Take the answer to your accountant before you sign. How the deduction is taken differs between a corporation, a partnership and a sole proprietor, and the deadlines for adopting and funding a plan are tied to the tax return. An illustration that shows tax savings without naming your entity type is still a draft.
Which owners have you talked out of one of these plans, and why?
Why ask it
A candid actuary has a list: owners with uneven income, young owners with older staff, anyone who may sell or close within a few years, anyone not yet filling a 401(k). If the reply is that it suits everybody, get a second opinion. You are listening for whether your own situation is on the list.
How to get straight answers about a cash balance plan
Practical guidance for the conversation itself
Who to ask what
HR for rules and dates
Eligibility, the vesting date, which pay counts and when credits post are plan rules, and HR or the benefits team can usually answer them from the summary plan description. Ask them to point to the section, because the document outranks anyone's memory of it.
The administrator for your own numbers
A balance, a payout quote or a pension estimate comes from the plan administrator or the actuary behind them. Request these in writing with an 'as of' date. A figure given over the phone is hard to rely on six months later.
Your own advisor for the decision
Whether to take a lump sum, how to invest beside the plan and what a payout does to your tax bill are personal questions. HR generally cannot advise on them and should not be pressed to. Take the plan's figures to a planner or tax preparer who is paid by you.
Owners: the actuary before the salesperson
If you are weighing whether to sponsor a plan, the actuary's illustration is the document that matters. Ask to speak with the person who will sign the funding certification, not only the advisor who introduced the idea.
Turning answers into numbers
Ask for dollars on your own pay
A formula such as 'five percent of pay plus interest' is easy to nod along to and hard to plan around. Ask what it produced for you last year, and what it would produce at your current salary if you stayed five more years.
Pin every 'it depends' to a date
Vesting, last-day rules and election windows all turn on specific days. When an answer starts with 'it depends', ask for the date it depends on and put it in your calendar.
Ask for two scenarios, not one
Any projection rests on an assumed crediting rate. Have it run at the current rate and at the lowest rate the plan permits, so you can see how much of the forecast is promise and how much is hope.
Keep a file
Save each annual statement, the summary plan description in force when you joined, and any conversion notice. Employers merge, recordkeepers change, and a benefit earned in your thirties may not be claimed until your sixties.
Decisions that are hard to undo
Resigning near a vesting date
Someone a few months short of vesting with a job offer in hand can ask the new employer for a later start date, or weigh the unvested balance against the raise. Either way the comparison needs the exact vesting date and the amount payable on it, which is why those two questions open the Vesting and value group.
Lump sum or monthly pension
Put three figures side by side: the plan's monthly pension, an insurer's quote on the same sum, and what you could draw from a rollover yourself. Once pension payments begin the choice normally cannot be reversed, while money that has been rolled over can usually still be turned into income later. That difference is a reason to take longer over the pension election, not a reason to avoid it.
An election during a conversion
Where staff are given a choice between the old formula and the new, the window is usually short and the choice final. Ask for the side-by-side projection before the window opens, and do not rely on a coworker's result: age and service change the answer.
Adopting a plan as an owner
Signing the plan document commits the business to funding it. Before that point, ask for the illustration at your expected income and again at a poor year's income, and have your accountant read both.
Answers that deserve a second look
'It works just like a 401(k)'
It looks like one on a statement, and that is usually where the likeness ends. In most plans there is no fund menu, the employer carries the funding, and the payout rules are a pension's. Treat the phrase as a cue to ask how the two differ.
A balance quoted as if it were a payout
The statement figure may include credits you have not vested in, or leave out an older pension benefit held alongside. Until someone confirms the amount payable to you on a given date, the balance is a starting point.
Tax savings with no bad year shown
An owner's illustration that shows only a strong year tells half the story. The required contribution in a weak year is the figure that decides whether the business can live with the plan.
'We will get back to you' with no date
Benefits questions do get lost. Follow up in writing, name the document you are waiting for, and ask who else can answer. If questions about funding or vesting keep going unanswered, raise them with the plan administrator directly.