Cash Balance Plans Are the Up-and-Coming DB Choice

As the decline of traditional defined benefit plans continues, cash balance plans may be a wise alternative to provide employees with lifetime income, according to a new report from October Three Consulting.

In a cash balance plan, a type of defined benefit plan, all assets are held in a pooled account, and a participant’s benefit is determined by the terms of the plan document. The account balance grows through pay credits, often defined as a percentage of an employee’s annual salary, and interest credits based on the growth of investments in the plan, at either a fixed or variable rate.

According to October Three’s analysis of Form 5500s, between 2015 and 2024, the number of cash balance plans increased by nearly 70%, while the number of traditional DB plans decreased by more than 50%. In 2015, there were more than 27,000 traditional DB plans and almost 15,000 cash balance plans. As of the 2024 filings, there were roughly 25,000 cash balance plans, compared with about 13,500 traditional DB pensions.

Cash balance plans comprised roughly 65% of all defined benefit plans. Of the more than 41,000 DB plans on the market, about 74% were active, leaving 26% frozen.

More than two-thirds of the active plans (69%) were cash balance, and less than one-third (31%) were traditional DB. Meanwhile, traditional DB plans made up 60% of all frozen plans. October Three’s report pointed to higher levels of risk and more management complexity for traditional DB plans as among the reasons for the imbalance.

Participant and Asset Counts

While the number of cash balance plans has surpassed that of traditional plans, traditional plans still exceed cash balance plans in terms of total participants and assets, according to the report.

Traditional plans had about 9.3 million participants, compared with roughly 8.8 million in cash balance plans. October Three’s analysis showed traditional DB plans had a much larger proportion of retirees than active or deferred participants, while cash balance plans—which are mostly newer—were more evenly split and had a greater proportion and greater number of active participants of the two plan types.

Plan assets have declined across all DB plans since 2021, partially attributable to the large number of retiree payouts from frozen traditional plans—which, the report notes, do not add new participants. In addition, favorable market conditions have bred funding surpluses and lowered annuity purchase prices, prompting many plan sponsors to de-risk their plans through pension risk transfers.

“The expansion and contraction of assets annually is well matched between cash balance and traditional DB plans,” the report stated. “However, the difference between traditional DB assets and cash balance plan assets has consistently decreased year over year.”

For plans that have filed for the 2024 calendar year thus far, employers made contributions of about $19.7 billion to traditional DB plans and approximately $18.7 billion to cash balance plans. Of contributions made to traditional DB plans, 22% went to frozen plans, while 10% of cash balance contributions went to frozen plans.

The Future of Cash Balance Plans

As of 2024, the health care sector accounted for 32% of all cash balance plans, totaling about 8,800 plans. Professional services and legal services employers followed, at roughly 3,300 plans (12%) and about 2,300 plans (9%), respectively. By number of participants, cash balance plans in the manufacturing sector had the greatest share (approximately 2.5 million, or 29%). The finance and insurance sector came in second (about 1.7 million, or 19%) and health care was third at roughly 1 million, or 12%.

Of all new cash balance plans with at least 100 participants launched since 2018, market-based cash balance plans—in which the interest credits are derived from the actual return on plan assets, as opposed to a traditional cash balance plan’s fixed rate of return or a rate of return tied to a bond index—made up 53% of the market, while flat-rate plans made up 36%. The remaining 11% of the market linked interest crediting rates to Treasury yields or IRS segments.

On January 14, the Financial Accounting Standards Board clarified the accounting treatment for market-based cash balance plans, immunizing them from the balance sheet accounting risk and volatility typical of DB plans. According to October Three’s report, the change will likely encourage plan sponsors with a fixed-rate cash balance plan to transition to a market-based plan to minimize ongoing risk and volatility.

October Three based its analysis for the “2026 Cash Balance Report” on the most recent Form 5500 filings for cash balance plans, with projections to account for the number of off-calendar year plans that have not yet filed for 2024 and were therefore missing from the current data. The projections were based on comparisons made to late filings from past years.