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.