These are a type of portable defined benefit plan. Â The employer funds the overall plan while each employee is given a "phantom" account showing the value of their benefit.
For example, each year the employee´s account might be credited x% of annual pay plus interest. Â You can base the interest rate on a standard benchmark like the T-bill rate.
When the employee leaves the firm they can take their lump-sum benefit with them.
Pensions are technically complicated and, to many employees, boring. Â HR has done a good job of managing pension plans over the years, with most of their work being invisible to employees. Â
What was also invisible was the underlying rationale: pensions existed to reward employees for long service. Â They didn´t really matter to employees until they approached retirement.
The world, and the role of pensions, has changed in some important ways:
v     One is that the long term career is history-certainly in popular perception, if not always in reality.   This means pensions paid upon retirement are not valued.
v     The talent shortage has put pressure on HR to get the most out of their reward dollar.  Benefits, such as pensions, have to be seen as valuable as part of recruitment and retention strategy.
These changes mean that approaches to pensions, like cash balance plans, are worth investigating.
v     Portability: Employees can take their cash-balance pension money as a lump sum when they leave the organization.  This appeals to the typical employee who doesn´t expect to stay where they are until retirement.
v     Visibility: Employees should be regularly informed of the value of their cash-balance plan, they should see it accumulate.  Since the plan is portable this becomes "real" money to employees, not something that will only be meaningful in the distant future.  Note that visibility won´t happen unless you do a good job of communicating the plan.
v     Typically these are offered in addition to 401(k) plans.
v     They are usually relatively easy to administer.
v     They are relatively easy to understand and communicate.
A big issue is the profile of your employee population. Â If employees are young or turnover is high, they are likely to appreciate this kind of plan. Â
You also have to look at your own resources. Â Cash balance plans may be relatively easy to administer but it still takes time and effort on your part to set them up, communicate and maintain them. Â Â You have to make an assessment of the cost and benefit.
Finally, you will have to work out the specific cost of a cash balance plan versus a traditional defined benefits plan. Â You will probably need a consultant to help with this. Â The outlay for a cash balance plan, particularly in the short term, may be higher than with traditional defined benefits plans.
Everything HR does should be based on an understanding of the organization´s strategy and values. Â If a cash balance plan helps deliver a strategic result then it is worth pursuing-otherwise HR should devote its attention elsewhere.
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