| The investment goal of a Cash Balance Plan is to achieve the plan's guaranteed rate of return. As this objective is significantly different from the investment goals in other types of retirement plans and individual accounts, the strategies employed to meet this goal are equally unique.
The assets in a Cash Balance Plan are pooled and invested collectively; however, each participant has their own hypothetical account balance. This balance grows annually with employer contributions and the guaranteed interest credit, regardless of the plan's actual investment performance. It is important that the plan assets be managed to meet the guaranteed rate of return.
If the plan's investment return is higher than the guaranteed rate, then excess returns are used to offset future years' contributions. If the investment return is less than the guaranteed rate, then the plan sponsor must contribute more over time to make up for the shortfalls. This make-up contribution is amortized over five years.
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