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cash balance pension plans

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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