A type of employee pension benefit plan that has two distinct features: (1)
the employer contributes to the plan an amount equal to a percentage of an employee's
yearly earnings and (2) the plan promises a specific rate of return on that
contribution. Under a cash balance plan, the benefit is always expressed as
a total account balance. Cash balance pension plans are distinct from "traditional"
defined benefit pension plans, which, in contrast, promise an employee a flat
dollar amount (either on a periodic or on a lump-sum basis), based on years
of service and an employee's earnings in the years closest to retirement. The
focus of cash balance plans is on wealth building and portability. On the other
hand, traditional defined benefit plans are aimed at encouraging career employment
with a single employer. In recent years, considerable litigation has arisen
out of employer conversions from "traditional" defined benefit to cash balance
pension plans. Older, long-term employees who typically receive lower benefits
under cash balance plans have alleged that such plans are unfairly discriminatory.
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