Cash Balance Plan vs 401(k): The Key Differences

Cash balance plan vs 401(k): a 401(k) is a defined contribution plan with real individual accounts. A cash balance plan is a defined benefit plan. Its accounts are hypothetical, and the employer generally pays in and carries the investment risk. Episode 4 of Cash Balance Plans 101 from Emparion. Learn more: https://www.emparion.com/?utm_source=... Most owners know the 401(k). Here we put a cash balance plan next to it, one difference at a time. Neither plan is automatically better. They do different jobs, and many owners use both. Made for business owners, physicians, dentists, attorneys and other professionals. CPAs and financial advisors: feel free to share this series with clients who ask about cash balance plans. In this video: 0:00 Welcome back, and the plan type 0:26 Who puts money in 0:44 A real account vs a hypothetical account 1:04 Who picks the investments and carries the risk 1:34 How each balance grows 2:01 Flexibility and how much can go in 2:53 How each plan pays out 3:13 Yearly administration and cost 3:33 Recap and what's next Questions answered in this video: Is a cash balance plan a 401(k)? No. A 401(k) is a defined contribution plan. A cash balance plan is a defined benefit plan, on the pension side. Who puts money in? In a 401(k), employees can put in part of their pay, and the employer adds any contributions the plan provides. In a cash balance plan, it's generally the employer who pays in. Is a cash balance account a real individual account? No. It is hypothetical, a paper record of the benefit earned under the plan's terms. The real money sits in the plan's pooled investments. Who picks the investments and carries the risk? In a 401(k), participants usually pick from options the employer chooses and monitors, and they carry the investment risk. In a cash balance plan, the employer, or an investment manager it chooses, manages the pooled investments, and the employer generally carries that risk. How does each balance grow? A 401(k) balance depends on what goes in, how the investments do and any fees, so it can go up or down. A cash balance account generally grows with pay credits and interest credits under the plan's rules. Which plan is more flexible? 401(k) contributions are usually more flexible, within the plan's terms. A cash balance plan is more of a commitment: each year the plan's actuary works out a contribution range, and the low end is required. Can a cash balance plan allow larger tax-deductible contributions than a 401(k) alone? For some owners, it may, depending on age, income and plan design. It has its own limits. Benefits are generally taxed when paid out. This is general education, not tax advice. How is each plan paid out? Once the plan's rules allow, a 401(k) balance is usually taken as withdrawals or rolled over. A cash balance plan generally must offer an annuity, meaning monthly payments for life, and a lump sum is often available. Does a cash balance plan cost more to run? Generally, yes. Both plans need yearly testing and filings, and a cash balance plan also needs the actuary's yearly valuation. Can you have a cash balance plan and a 401(k)? In many cases, yes. Rules connect the two plans, so they should be designed together. Is one plan better? Neither is automatically better. The right fit depends on the business, its goals, cash flow and employees. Cash Balance Plans 101 | Module 1: The Basics Full playlist:    • Cash Balance Plans 101 | Module 1: The Basics   Episode 1: What Is a Cash Balance Plan? Explained in Plain English    • What Is a Cash Balance Plan? Explained in ...   Episode 2: Defined Benefit vs Defined Contribution: Where Cash Balance Plans Fit    • Defined Benefit vs Defined Contribution: W...   Episode 3: How Does a Cash Balance Plan Work? Credits, Funding and Payouts    • How Does a Cash Balance Plan Work? Credits...   Episode 4: Cash Balance Plan vs 401(k): The Key Differences (this video) Next: Episode 5, Cash Balance Plan vs a Traditional Pension: The Key Differences    • Cash Balance Plan vs a Traditional Pension...   Learn more, or see whether a cash balance plan might be right for your business: https://www.emparion.com/?utm_source=... About Emparion Emparion is a third-party administrator (TPA) that specializes in cash balance plans and defined benefit plans, and we help business owners design and run their plans. Emparion is a TPA, not the investment custodian. We do not hold or invest plan money. Disclosures This video is general education, not tax, legal or investment advice. Any examples and visuals are illustrative only. How a specific plan works depends on its plan document, and tax results depend on your own situation, so talk with your own tax, legal and financial advisors before making decisions. #CashBalancePlan #401k #RetirementPlanning