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How Do I Invest Money in My Cash-Balance Plan?

A cash-balance plan is a type of retirement savings plan that combines elements of traditional defined benefit plans and 401(k)-style defined contribution plans. While employees may not have direct control over their accounts in a cash-balance plan, they can still have some influence on the contributions made each year. In this article, we will explore how individuals can make the most of their cash-balance plans by optimizing their investment strategies.

One important aspect to keep in mind is that contributions to a cash-balance plan should not be adjusted frequently. It is generally recommended to make adjustments only every few years to maintain stability and consistency in the plan. However, when adjustments are made, they can have a significant impact on the overall growth of the plan.

For small partnerships with fewer employees, there tends to be more flexibility in adjusting the cash-balance plan. In these cases, the owners of the business may be more willing to navigate the administrative requirements necessary to modify the plan. It is important to note that making changes to the plan may require the creation of a new plan document, so careful consideration should be given to the potential benefits and costs of any modifications.

In small partnerships, owners can take advantage of cash-balance plans to defer income on their own compensation. Although these plans technically only accept employer contributions, the owners can still benefit from the income deferral feature. It is crucial to understand that the employer assumes all investment risks associated with the pooled assets in the plan.

The pooled assets in a cash-balance plan can generate gains over time, providing an opportunity for employers to inject more capital into their businesses. However, it is common for employers to maintain a substantial reserve to safeguard against years of poor investment performance. This reserve ensures that contributions can still be made, even if the assets in the pension fund experience a decline in value.

Employers are required to make contributions to a cash-balance plan each year based on the employee's salary, as well as an interest-crediting contribution. These contributions are then credited to each employee's "hypothetical" account, which is essentially an accounting line-item that tracks the value of their retirement benefits. However, it is important to note that the assets in the plan remain pooled together.

Now that we understand the basics of a cash-balance plan, let's explore some strategies for optimizing your investments within this type of retirement savings vehicle.

  1. Diversify Your Investments: While you may not have direct control over the investment decisions within a cash-balance plan, it is still essential to diversify your overall retirement portfolio. Consider other investment vehicles such as individual retirement accounts (IRAs) or taxable brokerage accounts to diversify your risk and potentially achieve higher returns.

  2. Understand the Plan's Investment Options: Familiarize yourself with the investment options available within your cash-balance plan. Review the plan's prospectus and seek professional advice if needed. Understanding the investment choices will help you make informed decisions about your overall investment strategy.

  3. Monitor Plan Performance: Stay informed about the performance of your cash-balance plan. Review quarterly or annual statements provided by your plan administrator. Monitoring the plan's performance can help you identify trends and assess whether adjustments need to be made.

  4. Consider Tax Implications: Cash-balance plans have specific tax implications. Consult with a tax advisor to understand how contributions, earnings, and withdrawals from the plan will affect your tax obligations. This knowledge will enable you to plan effectively and optimize your tax situation.

  5. Review Your Retirement Goals: Regularly reassess your retirement goals and evaluate whether your cash-balance plan aligns with those objectives. If necessary, consider adjusting your contributions or exploring additional retirement savings options to ensure you are on track to meet your retirement needs.


Employees do not have control of their own accounts in a Cash Balance plan, but they can possibly influence how much is contributed each year. Contributions to a Cash Balance plan should not be adjusted more than once every few years, but they can be adjusted.

In small partnerships without many, or any, employees, there is likely to be more flexibility, or willingness for the owners of the business to jump through the hoops required to have the plan re-worked. Such changes could require a new plan document.

In small partnerships the owners can use these to defer income on their own compensation, but technically these plans only take employer contributions. The employer bears all investment risk on the pooled assets.

Hypothetically this can also mean that they can use gains over their guarantees to infuse more money into the operations and capital projects of the business, but in most cases they will play it safe and keep a substantial reserve on hand since they cannot avoid making contributions in years where the investment performance of the assets in the pension fund goes down.

Employers must make a contribution each year based on the employee’s salary as well as an interest-crediting contribution, and these contributions are credited to the “hypothetical” account for each employee, which really just means an accounting line-item is updated, but the assets remained pooled together.

What Happens If I Withdraw Money From My Cash-Balance Plan Before I Retire?
How Do I Allocate my Assets in Retirement?

Disclaimers and Limitations

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