Brief Discusses Cash Balance Plans for Public Employers

February 14, 2014 ( – As traditional defined benefit pension plans are placing a strain on state and local budgets, policymakers across the country are taking a closer look at alternative ways to design a retirement plan.

A number of states and municipalities have made the move to cash balance plans, according to a brief from The Pew Charitable Trusts. “While there is no one-size-fits-all solution, well-designed cash balance plans, like well-designed traditional defined benefit or defined contribution plans, can help government employers meet their recruitment and retention goals while offering the following key elements needed to help employees achieve a secure retirement: Fully funded retirement benefits; Access to professionally managed, low-fee, pooled investments with appropriate asset allocations; and Access to lifetime income options, or annuities,” the brief says.

This brief provides an overview of cash balance plan designs and discusses related policy issues. In addition, it offers examples of how several states have shown well-designed cash balance plans can be affordable, sustainable and secure.

The brief notes that when crafting such a plan, policymakers must focus on setting an adequate level of employer and employee contributions, determining how to share investment uncertainty while providing retirement security between employees and employers, and how to offer benefits to employees who are retiring or leaving for a different job.

“By explicitly promising a minimum investment return and sharing any additional earnings, a cash balance plan may be a vehicle that public employers use to improve the predictability of their costs, which will protect their budgets from economic downturns while ensuring that employees receive a significant benefit,” it states.

The brief is available here.