Cash Balance Pension Plans: Good News or Bad News?

Abstract

Modification of defined benefit plans and conversion of defined contribution plans into Cash Balance Pension Plans (CBPs) has attracted a lot of attention recently. A comparison of the three plans and an examination of 10 companies reveal a significant financial incentive in favor of CBPs. The “good news” for a younger employee is level accrual of benefits and plan portability, and for stockholders, a smaller impact on net income. CBPs bear “bad news” for older and/or less mobile employees and the stockholders when the plan assets perform poorly.