A cash balance plan is similar to defined
contribution but it guarantees a fixed rate of return. That means, the employer and/or employee must
adequately fund the plan so it meets the guarantee. The higher the guaranteed return, the greater
the risk that the fund put aside for the plan will not be adequate so ultimately
the employer bears some risk. In
contrast, in a defined-contribution plan, once the employer contribution is
made there is no risk to the employer.
One issue is the ability to turn the cash balance in an account into an
annuity. In principle, one can take a
cash sum and buy an annuity (a monthly income) from a commercial insurance
company. However, the return per dollar is
typically less than is provided by a public plan. Unclear, as with the governor’s proposal, is whether such a
hybrid plan would apply to UC. UC has taken the position that it shouldn’t.
An article about a legislative hearing on the alternative
hybrid is at
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