Cash Balance
Money Purchase Plan vs. Cash Balance Plan: Understanding the Variations
November 27, 2023

Two common choices are Money Purchase Plans and Cash Balance Plans, and understanding the differences between them is vital for making informed decisions regarding your financial future.


Money Purchase Plan:


A Money Purchase Plan is a defined contribution retirement plan. In this setup, both the employer and employees contribute to the plan. Contributions are typically based on a fixed percentage of the employee's salary. Here are some key characteristics of Money Purchase Plans:


Fixed Contributions: Contributions are predetermined and consistent, often based on a percentage of an employee's salary. This provides stability but may not allow for as much flexibility.


Investment Accounts: Contributions are invested in individual accounts for each employee. The value of the account depends on the contributions and the performance of investments.


Employer Responsibility: The employer bears the responsibility for funding the plan and ensuring that contributions are made as agreed upon.


Cash Balance Plan:


Cash Balance Plans are a hybrid retirement plan, combining elements of both defined contribution and defined benefit plans. Here's what you need to know about Cash Balance Plans:


Guaranteed Benefits: Employees are promised a specific benefit upon retirement, usually in the form of a lump sum or an annuity. This benefit is often based on a percentage of the employee's salary and years of service.


Notional Accounts: Unlike Money Purchase Plans, Cash Balance Plans maintain notional accounts for each participant. These accounts grow with contributions and are credited with interest.


Employer Contributions: Employers are responsible for contributing a specified amount each year to fund employees' notional accounts. These contributions are generally age-independent.


Key Differences:

The primary distinctions between these two retirement plans are in how contributions are made, how benefits are determined, and the level of predictability they offer. Money Purchase Plans involve fixed contributions and individual investment accounts, while Cash Balance Plans promise a specific benefit at retirement.

If you're looking to secure your financial future through a Money Purchase Plan or Cash Balance Plan, Retirebetter is here to help. Our team of experts specializes in tailoring retirement solutions that suit your unique needs. Contact us today to explore our services and discover how we can assist you in achieving a more secure retirement.