Cash balance plans: Where to start and how to optimize

Cash balance plans continue to grow in popularity as sponsors look for ways to deliver competitive benefits while managing cost and risk. These two companion papers are designed for plan sponsors and advisors who want a clear overview and then a deeper dive into investment and design decisions.

A cash balance plan is a type of defined benefit (DB) plan that’s structured to look and feel like a traditional defined contribution (DC) plan (e.g., a 401(k)) from the participant perspective. Cash balance plans are often referred to as hybrid plans because they incorporate features of both traditional defined benefit plans and defined contribution plans.

In a cash balance plan, each eligible participant’s hypothetical account value accumulates over time as defined by the terms of the plan. The two primary components that drive the growth in those account balances are pay credits and interest credits.

New to cash balance or need a refresher on the fundamentals? If so, start with Cash Balance Basics. It explains how these plans work, why they’re gaining traction, and the key design levers sponsor’s control.

Already familiar with cash balance mechanics and interested in investment strategies and design considerations? Go to Optimizing Cash Balance Investments and Design. It explores asset allocation implications under different interest crediting approaches, the pros and cons of market based designs, and the practicalities of transitioning. 

How cash balance plans are structured, including pay credits, interest credits, and typical legal/regulatory requirements under ERISA and the Internal Revenue Code.

• Common interest crediting methods (fixed, Treasury linked, and market based) and how floors/caps affect participant outcomes and sponsor risk.
• Why adoption is growing, including recent legislative support, and how cash balance compares with DC and traditional DB plans.
• Key design considerations: setting pay credits, selecting an interest crediting approach, and aligning investments with plan objectives and risk tolerance.

• Investment implications of different interest crediting structures: how fixed or Treasury‑linked credits drive conservative allocations (and unavoidable asset‑liability mismatch risk), versus the natural hedgeavailable in market‑based designs.
• Practical guardrails for market‑based designs, including floors/caps, the Preservation of Capital rule, and how overly aggressive allocations can introduce funding risk.
• The role and limits of alternatives, with a focus on consistency of returns and liquidity for lump‑sum availability.
• Coordinating a cash balance plan alongside a DC plan, including participant communications and considerations for how the CB benefit may inform (but not determine) DC menu or TDF design under separate fiduciary oversight.
• Design transitions and SECURE 2.0: how recent guidance (e.g., IRS Notice 2024‑2) clarifies market‑rate crediting and provides time‑limited anti‑cutback relief for certain ICR changes, generally through December 31, 2026.

Our team partners with sponsors to design and implement cash balance strategies that:

• Improve plan governance and decision‑making.
• Optimize investment policy and asset allocation to align with your interest crediting rate.
• Reduce fees and ease administrative burdens through scalable processes.
• Focus on reducing balance sheet risk while delivering a competitive benefit and high‑touch service.

Have questions or want to discuss which approach fits your objectives? Email Pension@bofa.com.

Read the full Cash Balance Plan papers for insights on plan mechanics, investments, and design choices.