Cash Balance Pension Plans: the Smart Way to Turbocharge Your Retirement Contributions

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Cash balance plans have become increasingly popular in recent years. Findings from FuturePlan by Ascensus suggest these plans are the fastest-growing sector of the retirement plan market, with more than $1 trillion in assets nationwide.

According to the firm's most recent data from its 2020 National Cash Balance Research Report, the number of new cash balance plans increased by 17% in 2018 from 2017, versus just 2% growth in new 401(k) plans.

Why the surge in popularity? They allow high earners and sole business owners, such as physicians, attorneys, and accountants, to contribute far more than a 401(k) — typically $100,000 to $400,000 per year — with substantial tax deductions. They’re also less risky for employers than traditional pensions and easier for employees to understand. The Pension Protection Act of 2006 and the SECURE 2.0 Act made cash balance plans easier to set up and more flexible to manage, driving growth.

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To help you decide if a cash balance plan is right for you, we take a look at what they are, who they work best for, and how they differ from both 401(k)s and traditional pensions.

What is a cash balance plan?

A cash balance plan is like a traditional pension plan with a twist. It is a type of IRS-qualified retirement plan known as a “hybrid” plan. David Beahm, President & CEO of Blanchard and Company, illustrates it this way — “think of a cash balance plan as an IOU that grows.

Each year, the company writes 'a percentage of your pay' on that IOU and writes another line showing the interest it promises to add. Those numbers live on paper only — no one opens a separate bank account in your name — so the balance is called notional or hypothetical.”

But the promise is real. Beahm explains that by law, the company has to keep enough money in the plan’s overall pool to cover every employee’s IOU. If the pool’s investments have a bad year, the company must add extra cash to make the totals match what the statements say.

“That funding rule is what makes the benefit dependable, even though your personal balance isn’t sitting by itself in a dedicated account,” Beahm says.

How does a cash balance plan work?

Generally, there are two types of pension plans — defined benefit plans and defined contribution plans, like 401(k)s. With a cash balance plan, your employer promises you a certain payout when you retire. But instead of just stating you'll get X dollars each month, it sets up an account for you that grows with two things — a "pay credit," a portion of your salary, say 5%, your employer contributes, and "interest credits," a guaranteed return, such as 4-5% that is tied to an index such as the one-year treasury bill rate.

The best part? You don't have to worry about a plummeting stock market. Swings, either up or down, in the value of the plan's investments do not directly affect the benefit amounts promised to participants. Your employer manages the account and bears the investment risk. And you get the promised benefit regardless of market performance.

When you retire, you can typically choose a lump-sum payout, which can be rolled into an IRA or rolled over into another employer's plan if that plan accepts rollovers. If the account value is more than $5,000, you can elect an annuity instead. Oh, and it's tax-deferred, so you save on taxes now.

Who are cash balance plans for?

Cash balance plans are generally for business owners or high earners who want to stockpile a reserve fund for retirement, especially if they’re older and playing catch-up. With a cash balance plan, you can sock away more than with a 401(k) — think $200,000+ a year if you’re close to retirement. If you’re a doctor or a lawyer, or run a practice, you can set up a cash balance plan for yourself while still covering your staff to keep the IRS happy and retain good employees.

“A 55-year-old physician, for example, can shelter more than $350,000 in 2025 — roughly nine times today’s 401(k) cap—slashing a painful tax bill while fast-tracking retirement savings, says Yehuda Tropper, CEO at Beca Life Settlements. “Most new adopters, however, aren’t Fortune 500 giants; roughly six in ten plans live inside firms with nine or fewer employees, so staff still receive meaningful credits when owners pile in. In short, it’s a rescue vehicle for small-business owners and their teams that also treats rank-and-file fairly.”

Cash balance plans are also suitable for employees who like flexibility, since you can often take the lump sum if you switch jobs. Some employees will pair cash balance plans with a 401(k) to max out their savings. For regular employees, the employer will typically chip in 5% to 8% of their pay to make the plan work for everyone.

Which companies offer cash balance plans?

Over the past several years, there’s been a shift away from traditional pension plans. In the early 1990s, companies such as IBM, Duke Energy and AT&T started offering cash balance plans instead of traditional pensions or in tandem with defined contribution plans. These plans gained popularity among employers seeking to manage their costs and risks while providing competitive retirement benefits.

Today, small businesses are also jumping on board, as most plans cover fewer than 100 people. There are thousands of these plans out there (over 10,000 in 2019), covering more than 10 million participants, according to the Journal of Accountancy, so they’re more common than most people think, especially in professional fields.

In fact, World Advisors reports that over 60% of cash balance plans are offered by companies with nine or fewer employees, with the vast majority covering fewer than 100 employees. This might suggest that thousands of small firms — doctors’ offices, law practices or consulting gigs — are driving the trend.

Cash Balance Plan vs. Traditional 401(k)

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Row 0 - Cell 0	Cash Balance Plan	Traditional 401(k)
Row 1 - Cell 0	Row 1 - Cell 1	Row 1 - Cell 2
Type of plan	Defined benefit — your employer guarantees your payout	Defined contribution — your payout depends on how well your investments do
Who contributes	Mostly your employer, often 5% - 8% of your salary	Mostly you, with a possible employer match of around 4% - 6%
Possible savings	A pile of money. The IRS sets a cap on the total account balance of $3.5 million in 2025	Way less. $23,500 in 2025, or $31,000 if you're 50+
Who is at risk	Your employer. You get a steady interest credit no matter what	You. If the market crashes, you take the hit
Payout options	Lump sum or monthly payments for life	Take the money in your account or roll it over
Portability	Roll the lump sum to an IRA if you leave your job or retire	Super portable. It's your account, take it anywhere
Taxes	Tax-deferred. You won't pay taxes until you make withdrawals	Same as cash balance plans — tax deferred or tax-free for Roth 401(k)s
Security	Pension Benefit Guaranty Corporation (PBGC) insured	Defined contribution plans, including 401(k) plans, are not insured by any federal agency

Cash balance plans are great if you want guaranteed growth without worrying about market dips. But a 401(k) will give you more control and is simpler for most employees. Cash balance plans shine for high earners or small business owners; 401(k)s are the go-to for everyone else.

Cash Balance Plan vs. Traditional Pension Plan

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Row 0 - Cell 0	Cash Balance Plan	Traditional Pension Plan
Row 1 - Cell 0	Row 1 - Cell 1	Row 1 - Cell 2
How it works	You’ve got a “hypothetical account” with pay and interest credits	No account — just a promise of a monthly check based on salary and years worked
Payout	Generally, a lump sum or annuity. You can roll it over if you change jobs	Usually just a monthly payment for life. Lump sums are rare
How it grows	Steady interest credits (fixed or tied to an index)	Based on a formula. Contributions made by employers and employees, as well as investment returns on the funds
Who takes the risk	Employer, but the plan’s less generous if the market crashes	The employer is fully on the hook for the promised payout
Portability	It's way better — you can take the lump sum with you	Not great — leaving early often means a tiny benefit later
Who is it for?	Younger workers or job-hoppers who want flexibility	Older, long-term employees who plan to stay put

Cash balance plans are more flexible than traditional pension plans and perfect for anyone who might not stay with one company forever or who wants a lump sum to manage themselves. Traditional pensions are becoming scarce, and they lock in a steady paycheck for life, but tie you to the company and give you less control. Cash balance plans are often considered the middle ground — less risk than a 401(k), more freedom than a traditional pension.

Why you might want to consider a cash balance pension plan

Cash balance plans are becoming increasingly popular for both large and small companies. These savings vehicles let you stash away more than a 401(k) because they’re designed to hit a target retirement benefit, not just a fixed contribution limit.

The IRS caps the total account balance (the lifetime limit) at $3.5 million in 2025, according to the U.S. Department of Labor. Annual contributions to reach that cap can range from $100,000 to $400,000, depending on your age, income and plan design.

Besides, contributions are tax-deductible, so if you’re in a high tax bracket (like 37% federal, plus state), you could save $100,000+ in taxes annually while building a significant retirement nest egg.

For the past 18+ years, Kathryn has highlighted the humanity in personal finance by shaping stories that identify the opportunities and obstacles in managing a person's finances. All the same, she’ll jump on other equally important topics if needed. Kathryn graduated with a degree in Journalism and lives in Duluth, Minnesota. She joined Kiplinger in 2023 as a contributor.