NEW YORK (MainStreet) While many American workers long for the days when a company retirement meant a gold watch and a fat pension, few realize those days may be returning. A so-called "hybrid" retirement plan that guarantees a return -- rather than subjecting participants to white-knuckle market gains and losses is rapidly gaining favor.
"Cash balance" plans don't depend on worker contributions, but rather on employer "pay credits" -- such as 5% of your annual salary as well as an annual "interest credit," a fixed or variable interest rate tied to a benchmark. The participant doesn't take on the investment risk; the employer does.
It may all sound too good to be true. What company would offer such a plan? The fact is, the number of cash balance plans grew by 22% in 2012, the latest year for which IRS data is available. Nearly 9,650 cash balance plans were active in 2012, up from 7,926 in 2011, according to Kravitz, a retirement plan design and management firm.
And it's not necessarily a big-business perk. Nearly nine out of ten (87%) of all cash balance plans are with companies having fewer than 100 employees. The greatest number of new plans is being driven by firms with 25 or fewer employees. Medical and dental groups account for 39% of all plans nationally. Technical, legal and financial firms are also early adopters."These plans are an excellent fit for the retirement needs of professional services firms, because of their flexibility for multi-partner firms and high age-weighted contribution limits which allow older owners to double or triple pre-tax retirement savings," the research report says. "These hybrid plans combine the high contribution limits of a traditional defined benefit plan with the flexibility and portability of a 401(k) plan. They also avoid the common risk factors and runaway costs involved in traditional defined benefit plans." The Kravitz report lists California and New York as having the greatest number of hybrid retirement plans, accounting for nearly one-quarter (23%) of the national total. Of the top 10 states, Texas had the biggest increase in total plans (28%) from the previous year. At retirement, participants can rollover the balance of the account into an IRA or trigger a lifetime stream of income. Benefits in most cash balance plans are federally insured by the Pension Benefit Guaranty Corporation. --Written by Hal M. Bundrick for MainStreet